ECB meet to hint at rate-cuts, stabilise mkts: Nick Parsons

Nick Parsons of National Australia Bank, in his analysis of the European markets on CNBC-TV18, explains that the next ECB council meeting will see strong hints of a cut in rates and that will be enough to make investors think that there is some concerted action.

Parsons debunks the fear of the ESM and EFSF funds being used by Germany and says that these funds were setup in order to buy sovereign debt. He adds that if the markets were made aware that the funds would be used for the purpose they were designed for would at least put some cap on yields. Below is an edited transcript of the analysis on CNBC-TV18. Also watch the accompanying video Q: What’s your forecast for the markets and the QE?
A: Personally, we have no forecast though there is some scope for disappointment when the QE is announced. However, the day holds promise with Fed chairman Bernanke scheduled to address a press conference and expectations are high that a statement would be made regarding go ahead with the process of intervention.
The statement probably would be a promise to the market that the Fed stands ready, but be light on actual details. The Fed chairman wants to promise something without actually delivering it in the immediate future. Q: If things do pan out the way you think they will, do you think the markets are set for some kind of a correction? Do you think the market will still hold on or is a sell-off likely in disappointment if the Fed chairman fails to offer a concrete initiative?
A: Yes, I think there will be a sell-off on some disappointment. Let's remember, we have actually come quite a long way. At the start of June, the S&P was trading at 1,270 and today it is at 1,357.
So we have had a good rally and when we talk about scope for disappointment in a bit of a sell-off, the markets are not about to plunge into new lows nor set off a frenzy of aggressive selling on hopes of positive news from a communique from the G20.
There is reason to believe that with the formation of a government in Greece, talks of recovery are going to be back on track. The market could absorb a little bit of selling with the Fed meeting on August 1 and then the meeting of central bankers at Jackson Hole, Wyoming in the middle of August. Q: What about commodities and in particular, crude? Though the S&P rose in June, crude continues to fall. Will there be any further fall or is there a level where it will find support?
A: Crude has turned very interesting at the moment. Over the winter, in January and February, crude prices kept rising as the euro-dollar kept falling. That was an exceptionally unusual state of affairs because the two are often very highly correlated.
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Now the reason for that was that there was a premium in the market for Iranian crude due to uncertainties about supplies and its geopolitical intentions within the Middle East.
Now as those Iranian concerns have come to nothing, the premium for Brent over the external value of the dollar has been erased. Crude prices are falling in line and as long as there is no further geopolitical tensions, there’s scope for a fall in prices.
Brent is trading at USD 94.90 per barrel at the moment after going as high as USD 124.15 per barrel in March. There has been a 24% decline from the top, but certainly in the absence of any further Middle-East tension, there could easily be another fall of USD 10. Q: There were rumours on Tuesday that Germany was mulling to allow purchase of Italian and Spanish bonds out of the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM). Do you think it is possible? What are your expectations from the EU summit on the June 28-29?
A: I am amused to read about the supposed leaks about ESM and EFSF funds because after all that's what they were precisely designed for. These funds were setup in order to buy sovereign debt.
The instilling of the feeling that they will be used for the purpose for which they were designed for over the course of the summer, would at least put some cap on yields. But there needs to be an activation or reactivation of the securities market programme if yields are to be substantially lower than current levels.
ESM is probably going to be enough to cap it but whether it’s enough to get yields back to more attractive levels for the borrower certainly remains to be seen. Regarding the EU summit, bear in mind that this is the 20th edition and the previous nineteen meetings failed to resolve anything at all. Q: The ECB did not step in with the S&P even when Spanish yields were high. Do you think the ECB is also waiting for the politicians to do something? Will the absence of stimulus either from either the Fed or the ECB in the near-term be detrimental for equities?
A: I think it will be detrimental and probably lead to a little bit of selling pressure. But the mood is by no means apocalyptic as it was at the end of May. The markets have rallied and are able to withstand the selling pressure.
I do think that at the next ECB council meeting we are going to see strong hints of a cut in rates and that will be enough to make investors think that there is some concerted action.
If the ECB were to either cut or to hint strongly that it would cut, that might well be enough to stabilise the market to slightly lower levels.