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Nov 30, 2012, 04.23 PM IST | Source: CNBC-TV18

'Mkt concerns to grow if no fiscal cliff resolution by Dec'

In an interview to CNBC-TV18, Sarah Hewin of Standard Chartered articulated her expectation on fiscal cliff. She said it is possible that at the last minute there will be a compromise agreement. She also said she is expecting a fiscal tightening in the first quarter.

In an interview to CNBC-TV18, Sarah Hewin of Standard Chartered articulated her expectation on the US fiscal cliff resolution.

"From our point of view, it always looked likely that we would go right to the end of the month’s deadline and the markets will continue to fret. The December 31 deadline will not be met and they will move into January," she elaboarted.

She expects the government to go ahead with a compromise agreement at the last minute. Fiscal tightening in the first quarter also seems likely to her.

Also read: Obama's 'fiscal cliff' proposal: $1.6trn in tax increases

Q: What are your expectations on the fiscal cliff? Will the resolution happen in January or will they ask for more time?

A: It is very difficult to tell at the moment. We had an initial optimism that there would be an early resolution. However, from our point of view it always looked likely that we would go right to the end of the month’s deadline and the markets will continue to fret.

The December 31 deadline will not be met and they will move into January. There is rush talk on both sides about a trigger on fiscal cliff. I think that the impact is going to become apparent on the economy, if the businesses are reluctant to invest.

There will be growing market concerns if we get to the end of December without a resolution. It is possible that at the last minute there will be a compromise agreement.  For now it is difficult to see where that is going to come from.

Q: In terms of euro zone do you think that is going to be sidelined for the next few days or weeks at least?  What are you watching out for Europe in the near-term?

A: Next week we will get details about Greece’s debt buyback. I think that there will be some focus on that. There are essentially two things that need to happen before the tranche of finance can be paid out to Greece. First of all some parliaments need to agree the terms of the revenue finance. That looks likely to happen in a pretty straightforward way.

Secondly, there has to be the debt buyback before the IMF will be prepared to release its share of the bailout payments. I think that will be pretty much the focus next week. At the same time, we will be continuing to look out for EM activity indicators. Purchasing managers indices (PMI) data will be coming out in the next week.

They are a sort of final indicators there which are likely to show that fourth quarter is still struggling in recession. So, all of these factors are going to be in background. If there is a hiccup to the debt buyback process in Greece then that will very quickly refocus market’s attention on the euro area risks.

Q: How do you expect markets to respond to this US deal? Are we going to see investors shying away from the US for the first quarter?

A: We are expecting that there will be a fiscal tightening. Assuming that we do avoid a prolonged fiscal cliff, therefore the impact on the economy is going to be negative. But at the same time we are seeing some signs of renewed activity, for example; the employment situation is improving in housing.

There will be reconstruction after Hurricane Sandy. Although the initial impact of the hurricane will be negative on GDP, in the early months of next year that should turn around. So, it is more a question, if markets feel that we are yet again in a sort of no compromise situation. If it looks like it will be prolonged, then that will be a cause for concern.

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