Don't see scope for year-end rally: BofA Merrill Lynch

With just two weeks left for this year to pass, Gary Baker, head-European equity strategy, BofA Merrill Lynch Global Research doesn't see scope for year-end rally for the markets.

In an interview to CNBC-TV18, Baker said that given the nature of crisis that world markets are facing, most people want to see this year out rather than think if there is another trade to be had. "We are seeing that in terms of fall in volumes," he said.
However, he feels that if some policy action in terms of rate cuts or reserve ratio requirement cuts happens in China then that might be one exception. "There is some speculation that might happen before Chinese New Year. So, maybe early next year rather than pre-Christmas might be a better bet," he added.
He further said that the EU summit has been largely disappointing, one has not seen a convincing solution to the European crisis. Below is the edited transcript of Baker's interview with CNBC-TV18. Also watch the accompanying video. Q: You have had a few days to study the outcome of the EU Summit and the statements which came through from ECB what is your key takeway? A: Well, the problem is it still comes somewhat short of fiscal union or what you might regard as a fiscal union. We have been largely disappointed by what we have seen so far. There is a lot of details that still remains fairly elusive to have this oversight of fiscal budgets that actually would work and what the enforcement mechanism would look like. Markets will need a lot more detail on this one in particular before they come out with final decision on it. But initial thoughts are we still haven't seen real convincing solution from EU politicians to put a floor under the crisis. Q: Would you go as far as to say it is a clearly disappointing outcome? A; Yes, it is disappointing, the UK situation became sort of the big headline news in the immediate aftermath of the summit. That initially hid just how little had been achieved in terms of what the plans were, what the detail was. Once the markets did have a little bit longer to really digest that and we saw gloomy selling on the back of what the detail was. Q: So what is your sense at BofA ML about what the final end game is with that we are lurching towards? A: We are of the opinion that you are going to have to see greater fiscal unity, but you are talking about transfer payments of some kind. I mean its just to condemn an awful lot of euro nations to prolong austerity for several more years is not going to be a recipe for a particularly exciting conclusion or interesting investment market. For me there is still this outstanding issue of whether we will get euro bonds, or whether the ECB plays more forceful role in the government bond market. Both of those are issues that need to be seen to really put a floor under what we are seeing so far. Q: The more recent fear has been that the S&P as its been threatening will downgrade many of the European nations, it has already downgraded some of the banks yesterday in US and Europe, is that a legitimate fear, do you see that happening? A: There are couple of things, catalysts that you need to look for Q1; one is clearly as you say the downgrade potential for rating agencies. They have made their case pretty clear and quite explicit and that is what they are looking to do. You might argue that it may not be a big surprise to markets given the announcements and the speculations. The reality is till that it would be negatively received. But the second point related to that is there is a very big refinancing schedule for bond issuance in Q1 from Italy, Spain, France and from other nations. That is going to take a lot of digesting in terms of the size of some of that issuance. If that happens at the same time as downgrades in the market then that is going to be a challenge. Q: Last two weeks left of the year, do you still hold out hopes of an year end rally which might salvage something of what has been very average and poor year for most markets? A: We have never been a great believer in it. I must say people tend to get excited about the seasonal affects and fair enough they were at various points in the past but equally if you look at years like 2008 then quite the reverse happened. Given the nature of this crisis, it seems to me that people want to see this year out rather than thinking there is another trade to be had and being active. We are seeing that in terms of fall in volumes. It doesn