Markets will trade on downside for few days: Credit Suisse

European markets are reeling under pressure over Spanish troubles but alarm bells are ringing louder than ever as investors fear Italy would be the next country to run into trouble if Spain needed a full bailout.

Even though there are fresh concerns now over Greece, Italy and Spain, these problems had never really gone away, says Robert Parker, vice chairman, Credit Suisse AMC.
The markets are discounting a lot of bad news on Greece and are discounting the bad news on the Spanish bank bailouts. They are discounting the bad news on the recession in countries like Spain and Italy and over the next month we are going to get a further round of monetary easing in Europe, America and China.
Parker says that today and for the next few days, markets will trade to the downside from these levels. “But the downside risk is limited particularly when economic indicators in Northern Europe, America and Asia should improve slightly in August or September when we get monetary easing and when investors are very long cash,” he adds. Below is an edited transcript of his interview. Q: What’s brought Europe back on the table as a key risk over the last 48 hours?
A: Two factors. Factor number one is Spain, where there were reports on Friday that a number of Spanish regions have financial difficulty and will have to go to the central government in Madrid for financial assistance. The second factor is Greece where there has been an IMF report saying that the IMF supports Greece, but it will not participate in further funding for Greece.
You have had a German statement questioning whether Greece is on track with the terms of its bailout program. All these stresses and strains that we have seen in Europe over the last three or four years have come back to the forefront. Q: Do you fear another leg of downside for global markets? If yes what could the extent of that look like?
A: I think we are going for a period of very low volume trading. Obviously the situation in Europe is not going to get resolved quickly. The markets are discounting a lot of bad news on Greece and are discounting the bad news on the Spanish bank bailouts. They are discounting the bad news on the recession in countries like Spain and Italy and over the next month we are going to get a further round of monetary easing in Europe, America and China.
My answer to your question is that, yes, today and for the next few days, markets will trade to the downside. But the downside risk is limited particularly when economic indicators in Northern Europe, America and Asia should improve slightly in August or September when we get monetary easing and when investors are very long cash. So, I think the downside is limited from these levels. Q: Are you saying we could have a dip in the next few days, but again get a tactical rally which might extend the summer rally after a dip and we should not think that it’s over for good?
A: If you ask the question is this the start of two-three months sustainable downtrend as we had very much in April-May and early June, my answer to that is no. We probably have a week, possibly, 10 days of market downside given that we have this pressure, particularly on Spain. But I think the risk on the downside now is probably limited for global equity markets to around 5% from today’s levels. Obviously, Southern Europe remains under severe pressure. We will see extreme volatility in the Spanish and Italian equity markets. Q: From which quarter do you expect monetary easing to come? From the Fed at the Jackson Hole meeting or do you think there will be support from the ECB towards the euro etc?
A: The answer to that question is all of those. You are going to get QE3 in August, early September from the Fed. You could have another interest rate cut or another round of long term refinancing from the ECB and I think you will have further monetary easing from the People Bank of China (PBoC).