Fed may not come up with QE3: Citi

Jurgen Michels, Citi, says that the steps taken by the Spanish government last week to come up with austerity measures shows that the country is preparing itself for measures aimed to bring the country back to the target of excessive deficit procedure and reach 3% deficit by 2014. Comments from Monte also suggests that they may vote for Spain and Italy may ask for assistance from the EFSF and then from ESM at the later stage.

Central bankers only come in and take action if the situation further deteriorates. There is a decent chance that the ECB may come up with another round of long-term refinancing operations. It is a very long way to see the ECB coming up with proper QE.
I don't think that the Fed may come up with QE3, and for that to happen there must be further more substantial deterioration of the economy and if that takes place, they are likely to take action. The message is clear: If the situation deteriorates further central banks are likely to take broader measures to prevent global slowdown. Below is the edited transcript of his interview to CNBC-TV18. Q: Despite a successful bond auction in the Italian markets, what is causing the euro dollar to be week?
A: We should not look at the upcoming auctions very closely. The underlying question to these countries is. Are these countries able to fund themselves in the market without any assistance? The steps taken by the Spanish government last week to come up with austerity measures shows that the country is preparing itself for measures aimed to bring the country back to the target of excessive deficit procedure and reach 3% deficit by 2014. I think this is very optimistic and rosy expectations as we expect the economy to contract more than the expected outcome. Comments from Monte also suggests that they may vote for Spain and Italy may ask for assistance from the EFSF and then from ESM at the later stage.
 
Q: Do you expect any central banks like People’s Bank of China, Draghi comment or Fed to announce something seminal enough in the next one-two months that will change asset allocation patterns?
A: I am not sure. It is up to the central bankers to change this pattern. In effect to the ECB, the central banks provide funds at very low rates and we may further see a decline in rates and additional liquidity coming in. So, they are likely to provide huge amount of liquidity at very low rates with the hope to improve lending activities along with negative real yields.
Looking at the euro area we see the deposit rates, very short-term rates set up by the ECB becoming negative. So, they want to put more incentives in action so that banks and investors will take some risk and start refueling economic activity. Q: In your book are you expecting any action in the form of QE, Fed announcement, Bernanke hint or the ECB buying bonds or unleashing liquidity by moving rates. Do you think they are likely to take any action that might improve or increase a risk on sentiment?
A: Central bankers only come in and take action if the situation further deteriorates. There is a decent chance that the ECB may come up with another round of long-term refinancing operations. It is a very long way to see the ECB coming up with proper QE.
I don't think that the Fed may come up with QE3, and for that to happen there must be further more substantial deterioration of the economy and if that takes place, they are likely to take action. The message is clear: If the situation deteriorates further central banks are likely to take broader measures to prevent global slowdown. Q: The German constitutional court is yet to revert on ESM (European Stability Mechanism). Could this or anything else be a negative surprise in the near term?
A: Today’s decision to delay the decision till September is a long waiting time. In the absence of this decision the German President will be unable to sign the treaty, and without his signature Germany will not ratify the ESM and without Germany’s rectification the 90% requested capital to activate the ESM will not be there. So, no ESM will be available before September, which is a bad news for the investors.
In this week a decision on Spanish bank bailout program by German Bundis and parliament is expected which they are likely to pass on Thursday and on Friday the Euro group may discuss the details of this program and may give approval. It is also likely that they may also discuss the Greece situation which looks vulnerable. Apart from this I don’t see any big meeting coming up due to upcoming holiday season.