Await Troika report, EU meet, Dutch polls in Sept: Hewin

Standard Chartered senior economist Sarah Hewin explains to CNBC-TV18 that though the data from the US is mixed, the mood on its economy is becoming more positive. Hewin highlights the number of significant events scheduled to occur across Europe in September that analysts are eagerly looking forward to. The events include the release of the Troika report on Greece, the Euro-group meeting and the Dutch polls.  

Below is an edited transcript of the analysis on CNBC-TV18.

Q: In the backdrop of the US yields moving sharply from about 1.4 to 1.8 in 20 days, will there be lesser quantitative easing from the US? What do you expect from the annual meeting of central bankers at Jackson Hole (Wyoming, US)?

A: The data from the US is mixed. Statistics reveal improvement in housing and employment data is better than expected. The Empire State Survey revealed a disappointing picture, but the mood on the US is becoming more positive. Though there is the prospect of QE, any likelihood of an announcement seems lesser by the day.

Q: How would you gauge what the European central bank might do? Even if the Fed does not announce a QE, do you expect Draghi to initiate some kind of easing?

A: We think that the situation in Europe is quite different from that in the US. There has been no halt in the process of fiscal tightening and there is a severe squeeze on credit. To worsen the situation, the cost of energy imports is rising. So, the European economy is facing headwinds from various different directions.

In my view, there is an increased likelihood that there will be another interest rate-cut. We have factored one in for the next meeting in September alongside other policy measures, possibly to improve liquidity and certainly to improve access to ECB liquidity by lowering collateral requirements.

Q: So you expect some kind of quantitative easing from the ECB?

A: The ECB is quite careful about terming it 'quantitative easing'. All bond purchases so far have been sterilised. So, its main injection of liquidity has not really been classic type of quantitative easing.

If we look at how far the balance-sheet of European central bank has expanded, it is clear that the ECB is certainly stimulating the economy by using its balance-sheet. So, there is some similarity in what the Fed and the Bank of England have done.

Q: What is on the top of your watch-list? In India, analysts are keenly awaiting the decision of the German constitutional court on the ESM and the Troika report on Greece. Apart from these events, is there anything important that you’re looking out for in Europe?

A: September is going to be an interesting month, particularly during the week when the German constitutional court decision is expected and this coincides with the Dutch general elections. So, that is going to be a reminder that politics is going to become increasingly important across the region, especially in the Northern European creditor-countries.

_PAGEBREAK_

The Euro-group meeting is also scheduled during the same week and the news on the Troika’s response to Greek’s measures to reduce deficit. It is likely that Greece might request an extension of the deadline to cut deficit which means more money will be needed. Only when these problems are resolved, will a better idea about the situation emerge.

Q: Could a bit of brinkmanship be expected?

A: I think there is a risk of brinkmanship in the way the negotiations between Greece and the Troika have always been managed- the decisions are taken at the last moment. Both sides take apparently rigid stances and then reach a compromise at the eleventh hour.

This could result in some stormy times for the market. Our concern is that, the markets are becoming too optimistic with the European problems being resolved or in the process of being resolved. Though the US economy is moving in the right direction, remember that the data indicates some rough weather for the US markets as well.

Q: Nothing justifies the movement of crude which is at USD 116. It is certainly being pushed by geopolitical factors. Do you sense if any resistance is going to come soon?

A: The geopolitical factors are difficult to quantify. But we need to really take the supply side into account and consider demand in advanced countries. It’s difficult to see why oil is at this level.