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Jul 12, 2012, 08.23 AM IST
Although, the European leaders came up with some positive news during the Euro Summit, Steve Brice, Chief Investment Strategist of Standard Chartered Bank feels that Europe must have structural reforms in the long-term.
Although, the European leaders came up with some positive news during the Euro Summit, Steve Brice, Chief Investment Strategist of Standard Chartered Bank feels that the ECB needs to offer more proactive responses.
In an interview with CNBC-TV18, Brice said that the European markets saw a rally on Friday because expectations were quite low and the leaders managed to surprise the market positively. ECB commentary and rate cut action expected to be announced during the week would be key to determining market direction, believes Brice. Besides, he sees the euro-dollar to stand at 1.18 by the end of this quarter.
Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.
Q: What did you make of the global equity reaction to the EU Summit? Does it look like there is more stay or more breed to the rally here?
A: I suppose in the short-term expectations were so low that something coming out was better than nothing and something significant did happen during the weekend. We have to acknowledge that as well. I think what we are saying is, for this to be sustainable we really need to see more proactive policy responses coming out from the ECB (European Central Bank).
Obviously, on Thursday we have got the rate decision where everybody is expecting a 25 bps cut. What I am more interested in looking for is to see if there is going to be any increase in bond prices going forward by the ECB. We have got the stability mechanism now able to buy bonds or reported to be allowed to buy bonds going forward in the primary market.
But I think the scale of intervention that is going to be required needs ECB involvement as well. That is going to be the key to whether this risk-on environment is going to be sustained in the coming weeks and months.
Q: Do you see the rally falter from hereon or do you see more upside for global equities in the near-term?
A: Well it's obviously going to be determined by what happens to the data this week. We are waiting for key data. We had key data out over the weekend from China which was still very weak. There are a lot of people talking about further stimulus there.
We have got the ISM data today from the States and also the Employment Report on Friday. We have had negative economic surprises out of US, Europe and China for some time now. If that were to continue this week, we will probably see the rally falter pretty abruptly as we go even from today. That's probably the key risk but, obviously all eyes will be on the ECB on Thursday.
Q: How would you play the second half of the year for equities then, would you expect performance to be far stronger or very different from the first half?
A: Yes we do see a much better environment than the first half. We actually saw quite a positive first half net-net although, not dramatically so. Q2 offset lot of the Q1 gains. But we do see equities building on those gains in the second half. We do have negative economic surprises in the short-term, we expect those to reverse out as we move forward in the next month or two.
But, Europe remains at the center of everyone's attention and until we see very significant expansion in monetary easing by the ECB, that's likely to be the focus for how people are looking at the world.
Q: The next event like you pointed out many times is the ECB meeting on July 5. From an investor's point of view, what are the key things that one should expect and what kind of follow-through are you expecting to see from ECB in terms of refinancing of rates etc?
A: The initial thing is we are looking for that 25 bps rate cut to come through. Then it is going to be key to see how much comfort they have taken from last week's developments on Thursday and Friday, in terms of the promises, in terms of giving it supervision over the banking sector and how much confidence it is taking from that may go to the next step of signaling increased bond purchases.
The ECB has been out of the bond market now in reality, since January. It did very minor purchases in February and March but, basically have been out since January. We really need to see that change for the sovereign debt crisis to come to an end.
We have seen the tail risk of the banking crisis fall dramatically with LTRO1 & 2 and the developments over the weekend on Spanish Bank recapitalization. But the reality is we need more. We need to actually cap sovereign debt yields in Italy and Spain for this crisis really to go into the background.
Q: Talking about the money markets itself, how much more relief do you expect to see on the euro dollar, because some amount of that enthusiasm has been tempered now?
A: Basically, for the year we have obviously seen a significant bounce in recent times. We believe this is going to lead to a selling opportunity for the year and we are already very close to that. We had seen very excessive short euro positions. We have to remember, if we don't get the ECB bond purchases then we are likely to see the euro falter as bond yields continue to push up towards the 7% mark that Spanish yields hit recently.
That would clearly be negative for the euro from a sentiment perspective and if the ECB doesn't take aggressive action then effectively that's printing money which may also weaken the euro. We still believe that we are going to see the euro head down towards 1.18 by the end of this quarter and in that environment, any rallies up to 1.27-1.28 probably will provide an opportunity to sell.
Q: How are you approaching India given the kind of recent performance we have seen and also if you believe that this risk-on may actually begin a rally in other asset classes like commodities?
A: Yes, obviously we saw a sharp rally in crude prices on Friday. We are neutral about India from a global perspective. One thing we would say here is we have seen excessive bearish propositions or views on India at the moment. As we have been highlighting before, when people are very bearish, it's usually a good time to reanalyze and relook at the situation to see whether it’s actually going to improve.
For international investors, I think the key is the rupee weakness. We do expect that to reverse in a significant way in H2. That may well bring money back, especially if inflation starts to fall as well and that allows bond yields to come down. So what we would say is, we would probably avoid being too bearish at this stage of the market cycle, but, yet we are not at a stage where we would upgrade to an overweight position.
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