Markets face downside as Fed ignores liquidity calls: NAB

In an interview to CNBC-TV18, Nick Parsons of National Australia Bank is doubtful that the debt crisis that the euro zone is dealing with is on the mend. “If anything, it’s getting worse and the economic recession in the peripheral countries is now spreading into the core in the north,” says Parsons.

Below is an edited transcript of his interview. Q: We understand that banks in Europe are depositing less cash with the ECB after the ECB cut deposit rates to zero? Is the rate cut working? Do you see somewhere that the economy is on the mend?
A: I am afraid that things do not appear to be on the mend in Europe, if anything the situation is getting worse and not better. The economic recession in the peripheral countries is now spreading into the core in the north. Only today, we saw the announcement from Peugeot, one of the largest car manufacturers in France saying it’s going to shut one of its factories for the first time in 20 years and 8,000 people are going to lose their jobs there.
This is by no means the largest of the major announcements. It’s one of the first. We fear there are many to come and we fear that the economic recession in Europe is going to get quite considerably worse before it hopefully begins to turn better in the early part of next year. Q: We have seen some relative calm in the European markets since the EU summit. Do you see any events that may escalate this uneasy calm into some kind of political brinkmanship events which are lined up because we have all these bond auctions or redemptions or any economic data points?
A: The low of the last few years has been 1.1850 and it would certainly be foolish to rule that out right now. In fact the lifetime average of the euro since it was launched in 1999 has been a shade over 1.19. So if we were to return to that 1.18-1.19 level, it would be very hard over the great scheme of time to argue that it was substantially cheap or indeed undervalued.
So that has been its long-term average. We were there only within the last three years. I think it would be rash and it would be full-hearty to say we are definitely not going to go there, the pressure is very much on the downside at the moment. Q: Today we have seen the Chinese GDP number lowest in three years. Growth data from the US, Europe, from India too are nothing to write home about. How do you see commodities panning out? Is the poor growth expectation already priced in or are there more falls to come in the major commodities?
A: Yes it is looking that outside the commodity space which is largely driven by the record summer heat across many states in America we are already seeing downward pressure being felt on commodities. It comes from two areas; one is the lack of demand. The world economy is slowing and that slowdown is worsening but also because investors are moving into the US dollar, the euro against the US dollar, this today has hit a two-year low.
So as the US dollar itself increases in value, so to that depresses commodity prices whether that be gold, oil, platinum, copper, industrial metals, base metals or precious metals, you go through the entire list. Those that are not driven by outside factors such as whether are probably going to come under pressure as a result of slowing world growth under rising US dollar. Q: The euro has been steadily declining. Today it’s even below 1.22 mark. Do you see QE3 on the cards immediately or do you see euro headed even lower in the run-up to the Jackson Hole event?
A: There is nothing specific to Europe on this calendar. If we look at the course of the next six-eight weeks and the great hope has got to be that at the last EU summit, the finance ministers might just have bought enough time so that this year unlike last year they are able to go away and have a summer holiday. So the great hope is that they have bought enough time to get us through until September.
The great fear however is that the very lack of global coordination and the fact that United States appears not to be as willing as many people had hoped to inject any monetary stimulus into the economy is leading markets still on to the downside. We have seen a fifth consecutive decline in the US stock market today. European markets have fallen everyday bar one for the last eight days and there is a feeling here that the sense of inertia in the United States is threatening to undermine asset values.
There are two big events which might come to our rescue. The first of these is next week when Fed chairman, Bernanke speaks to Congress to give his semi-annual testimony and then the big hope after that is when all the world central bankers get together in Jackson Hole, Wyoming in the middle of August that they begin to realise the seriousness of the economic situation and commit to coordinated action. That’s the great hope from here. Q: How do you look at the rupee? We saw that 57.30. Do you think that low will be the low of the year or will that be taken at any point in time?
A: What we can say about the rupee is that it is more likely to be buffeted by international events than it is by events domestically within India. What I mean by that is that if we are going to go through the old high of dollar-rupee then we are going to have to need to see euro making lows below 1.1850, we are going to have to see another 5-6% of global stock markets, we are going to have to see investors fleeing the emerging markets, universe as a whole in favour of safer instruments such as short-term bonds or American cash.
So if all those things were to materialise then we will be through 57.30 and we could well be on our way to 60 but that I would stress is very much the risk scenario, it is not our central estimate. If we can emerge through the summer months, if we can get from now to Jackson Hole without a calamity, then we have probably printed the high for dollar rupee.