Mar 09, 2012, 08.41 AM | Source: CNBC-TV18
“The thing that has unsettled global markets was China’s announcement that it was going to be revising down its growth forecast,” says Nick Parsons of National Australia Bank .
Nick Parsons (more)
Head of Markets Strategy, | Capital Expertise: Equity - Fundamental
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: We saw a lot of weakness in yesterday’s trade in terms of European markets because of the GDP growth data that came out. What do you think the markets made of everything in terms of the GDP data from Europe, from China as well as from Brazil?
A: I think the GDP data in Europe didn’t come as any surprise whatsoever. We already had initial estimates, and yesterday was just adding a bit of flesh to the bone. It didn’t tell us anything that the market didn’t already know. It appears that the southern European economies are in recession, that’s confirmed - two consecutive quarters of negative growth; France isn’t in yet; Germany only had one quarter, we have still got that north-south split, but frankly, it is not news.
I think the thing that has unsettled the global markets was China’s announcement on Sunday night and into Monday morning that it was going to be revising down its growth forecast. China at no point in the last 15 years has grown by 7.6%. So to pin a target of 7.5% just gave a little bit of a jolt to those people who had taken the view that China was going to be a bigger driving force behind the global economy. That’s what rattled investors and that’s what continues to do so this morning.
Q: How serious is the Greek issue, do you think that the private investors will agree to that 53% haircut?
A: Thursday is the deadline. I don’t think it’s particularly important we are going to reach it. Enough people will participate in the private sector initiatives such that there will be a debt swap. We still expect that the rating agencies will declare Greece formally in default on Monday of next week.
I don’t think they are going to get to 90% participation, they are going to get enough to be able to proceed with the swap; they will then invoke the so-called collective action clauses. Had that been a year ago, it could have been, where sentiment is concerned, a repeat of Lehman Brothers as we try to on take some very tight knitting. But now, the volume has fallen considerably, European banks have provisioned against their losses, the ECB has provided a trillion euro of liquidity. The system is prepared and quite resilient in the face of this default which is likely to be announced on Monday possibly Tuesday of next week. So it’s not going to the calamity that we fear.
Q: Not a calamity but will it be an event at all or is the market so prepared that it would be a non event? Should we watch out for something big on Tuesday?
A: I think it's an event more for lawyers and historians than it is for market practitioners.
Q: The other concern has been crude. What are you making in terms of what's happening on the geo-political tension? What are investors talking about and what are the levels that we could see on crude, especially Brent?
A: Brent at the moment is trading at USD 122.65. In local currency terms, it's actually back, as in many countries, above the peak that we saw in the summer of 2008. That in turn is going to slow growth. But I think it's the lower growth expectations themselves that are likely to put a cap on the prices of oil.
What we have seen over the last three-four sessions, there has been a move back into the US dollar, on both global equity markets and scaling back of risk appetite. What generally happens is that the stronger US dollar itself weights down on commodity prices. I would have thought that it's probably from here, not a great deal of upside in oil prices, if we are going to see just this nervous mood in equity markets persisting. So we are at USD 122.65; it's very unlikely that in the near term it will be above say USD 125. I think a vast majority of oil increase is already now behind us.
Q: You think the LTRO is all juiced up and now we are going to see a period of risk aversion or will appetite come back any time soon?
A: What we have seen over the course of last few sessions is that the market certainly in India has giving up the entire February rally. We are now back at levels we haven’t seen since 31st of January. In the developed markets, we only yesterday had a rout of 3-3.5%, big on the day, but if we look, DAX is still, for example, up to 12% year-to-date. I think what we are going to see just over the near term is a situation where the developed markets, those of continental Europe and the US, might just outperform the EM space because that China news is going to reverberate for some time to come.
And the other thing I have been pointing out is to look at currencies. The rupee at the end has moved down from 54 to 49 levels against the US dollar, indicating overseas participation in the equity market rally. That was very important. Moving from 49 back up to almost 51 at the moment is a little bit of a concern. It does suggest that overseas investors, global investors are just taking some money off the table in the EM space. So it might just be for the next little while that we do see the developed markets slightly outperforming EM.