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Jun 21, 2012, 04.18 PM IST
Equities have not made a decisive move on either side, and Enzio Von Pfeil of Commercial Economics Asia does not see one coming till Greece exits the eurozone.
Despite posting gains, global financial markets have seen tight, rangebound trading the past few days. Equities have not made a decisive move on either side, and Enzio Von Pfeil of Commercial Economics Asia does not see one coming till Greece exits the eurozone.
In an exclusive interview to CNBC-TV18, Von Pfeil says that markets will remain rangebound at the bottom end because of the problems in Europe. “The decisive thing will be probably once Greece exits the euro, after which the markets crack one final time and then that’s the big buying opportunity,” he said.
He further adds that a 10-15% fall from current levels will be a good buying opportunity.
Von Pfeil also goes on to say that any rebounds from now till then are only dead-cat bounces.
Below is an edited transcript of his interview with Reema Tendulkar and Latha Venkatesh. Also watch the accompanying video.
Q: From hereon, what are the triggers that markets are watching out for and which direction do you expect them to take?
A: I think the market is incorrectly watching for a bazooka solution in Europe. In other words, that there is one solution that is going to air and that’s why I think the market’s going to continue being disappointed. So any bounces that you see is what we call in broking dead-cat bounces.
Q: Before the FOMC meeting, everyone was expecting Operation Twist, but now that it has come the markets don’t seem to know which way to react or so it seems. Tangibly does it bring any amount of liquidity at all into the market and will we see it work its way into various asset classes in the months to come?
A: No it doesn’t really bring a lot of liquidity into the market because it just extends the maturity of the bonds. In other words, they are selling short-term bonds and they are buying long-term bonds basically, and that’s really meant to keep the housing sector going.
I would be of the view that that response of the market has been very muted because it’s not really going to have a great effect on the housing sector, the mortgage rates in particular. I think the market is still expecting a QE3 which we believe will actually come in the next few quarters.
Q: So how do the markets react immediately - are you going to see a ranged performance between risk on and risk off? Also, when do you see a decisive move either to the bottom or to the top by equities and commodities?
A: I think that we are not going to see much of a decisive move for sometime. As you were saying, it’s going to be range bound at the bottom, or in other words it’s going to keep on bouncing around and going nowhere because the Europeans cannot get their act together. It’s not that they won’t get the act together, but they cannot get their act together because 17 to 29 different nations are having to fight it out.
On top which I think that the commodities are what remain soft. The decisive thing will be probably once Greece exits the euro, then I think you will find the markets crack one final time and then that’s the big buying opportunity.
Q: How much could the crack be before someone could consider buying?
A: That’s anybody’s guess. My guess would be that it would fall another 10-15% from current levels and then just stay stuck for a while.
Q: Where would you advice the smart money to be parked in say the next one or two quarters?
A: Next one or two quarters I think definitely the US dollar just as a currency. The yen and the Swiss franc will remain quite strong against the dollar, and I think also the Australian and the New Zealand dollars would do all right. I am also of the view that you will find some interest in gold.
I do think that the tensions in Iran continue building on a couple of fronts - firstly the nuclear front and secondly on the Syrian front. Then you of course have also increased tensions in the South China Sea, so my favorite asset classes would be cash and gold.
Q: Do you expect any kind of central bank action in the next few months which will provide that liquidity boost for the markets which everyone was always watching out for?
A: I think that there will be central bank reactions. I think that that will provide more liquidity, but the liquidity will not go into lending. This is very important that when the European Central Bank came back in December of last year with its massive program, all that the banks did with that money was to actually just go and buy more euro bonds. In other words, they were riding the yield curve as we call it, they were borrowing short and lending long.
So regardless of what the central banks do, I think what we call the marginal utility of the effectiveness of further easing is going downhill. The central banks can keep on easing, it’s just not going to have that much of an effect.
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