Expect easing from ECB, hope for 25bps rate cut: Parsons

After the European Union summit threw up positive news of tackling the spiraling debt and borrowing woes of Italy and Spain, European markets saw a rally over the last week.

However, the European markets have been quite lackluster today and Nick Parsons of National Australia Bank attributes the reason for the slow trade to the close of US markets for Independence Day. According to him, the impetus from the US is not driving the European market and it is focusing on itself.
In an interview with CNBC-TV18, Parsons further added, the uninspiring picture painted by purchasing managers surveys from Germany, France and the euro zone has also not been taken well by the markets. He believes that the EU summit has actually bought a couple of months time for the markets and it is going to hold out throughout the European summer. Parsons expects the ECB to ease further and may even offer a 25bps rate cut. Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video. Q: The European markets are lackluster. Is all the enthusiasm of potential rate cut from the ECB wiped out for now?
A: I don't think the enthusiasm is wiped out. But we seem to be set for a fairly slow trading day, bearing in mind that it is Independence Day in the USA. All the US markets are closed today. They closed early yesterday afternoon. We haven’t got that transatlantic impetus driving Europe.
Europe really is inward looking, focusing on itself and we have seen over the course of the last hour that purchasing managers surveys from Germany, France and the euro zone as a whole, have painted a relatively lackluster picture. There is not a great deal of pressure impetus after this strong rise that we have seen over the last three sessions. Q: What's your base case expectation from the ECB and from the bank of England? More importantly, is that enough to give this rally in all risk asset classes a little more leg?
A: I think it has got potential to keep the market going. A lot of people are saying that the EU meeting last week only bought them a couple of weeks of time. We are of the view that it might well have bought a couple of months and there is probably enough now to keep the markets holding in throughout the European Summer.
I think the ECB will cut rates by 25 bps. The bank of England is certainly on track to easing. Whether that easing comes through the reserve requirement and in addition to its asset purchase program or cutting bank rate itself, we’ll find out tomorrow. But we know the Bank of England is going to do some easing.
The likelihood of a rally on Friday, when America is back and we get the payroll figures out is that we have got two options. One is that the employment figures are so poor that it really does revise hopes of another round of QE and QE3 sets sail or in fact the figures are so good that people start to revise some of their new found gloom about the US economies.
There are two chances of a rally on Friday from the US and we have got some potential easing coming through in Europe tomorrow. That also keeps risk assets holding in. And bear in mind that Europe is opening in the red but, its less than 0.5%. The Italian market is the only market that’s down more than 0.4% on the day. In the great scheme of things, it is not something to be really worried about in Europe. Q: Aside of the 25 bps rate cut from the ECB, is the market expecting anything on the S&P front or any mention of a potential easing or do you think just a 25 bps will mean the markets remain flat and there is no follow up rally?
A: Yes, I think the job of the ECB here is not to disappoint expectations. It would do that with any hint or suggestion that its policy response was in fact the final one. Therefore, we don't expect them to do that. Mr Draghi is a very sharp operator. I think what they will do is, he will give something to the market in terms of a small rate cut as a reward for the politicians behaving as they did last week.
That is a reward and a thank you but, also they have to hold out the carrot of more easing potentially still to come. He will talk I believe about the possibility of another 25 bps. He will certainly not shut the door on a third long-term repurchase operation and he will want the market to feel that there is more in reserve, if necessary.
If he does succeed in that, in keeping the mood of the glass being half full rather than half empty I think he is probably setting the scene for a couple of months during the summer in which markets at least hold in. That would be a very great change given what we have seen over the last couple of summers.
You will recall that it was August last year when we started to see a real downturn in the market. It was September the year before and if this gets us through to the end of September and the end of December holidays, I would think that is probably as much as we could expect from here. Q: After the ECB meet is done and we get a 25 bps, what is the next thing to watch out for, is there any other important event lined up that could continue to support the euro at levels around 1.26 or so?
A: I think the one that does loom on our calendar and I have not seen very much mention of it is the central bank meeting in Jackson Hole, Wyoming, which will be in the mid or late of August. That will be the chance for central bankers around the world to gather in a more informal surrounding and essentially do a health check of the world economy now and talk at least informally about coordinating future policy responses.
I would have thought that central bank meeting hosted in Jackson Hole is going to be the next focus of attention. Let us remember also that it is at that meeting that Fed Chairman Bernanke in the past has announced further QE measures. I think that is the one that we will start to look at more closely. Q: Finally, if it does come to happen that the entire European summer sees markets fairly in the green which risk asset classes do you think may be in the forefront, would it be US equities, European equities or would it be crude, metals, emerging market equities?
A: I am beginning to warm to the possibility of looking at the emerging market equities and the emerging market currencies and commodities. They have certainly lagged behind during the course of the recent rally. We have talked a lot about currencies and we said that it is not until the currencies stabilize and show some strength that we can begin to be a bit more certain or a bit more hopeful that overseas money is coming into it.
Now we have got the rupee at 54.78, that's almost 2.5 full big figures below its recent high. There are some signs here that the Asia ex-Japan currencies are finding a little bit of support and if that's the case, then it could be that EM and commodities are due to have a little bit better performance than we have seen of late.
I would take some encouragement from the performance of the currency. I think maybe this could be time, after a long period of underperformance, to see that balance being addressed a little bit.