Tumultuous week ahead on Spanish woes: UBS

In an interview to CNBC-TV18, Martin Lueck, economist, UBS explains that the results of the Greek elections will last only till the near-term. He adds that the EU will have to re-direct its attention to the worsening situation in Spain and Italy. The Fed is expected to leave its options open considering uncertainity in the business cycle and increasing unemployment in the US.

Below in an edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: Your note maintains that while the results of the Greek polls are a positive near-term, uncertainties are expected to continue. How do you see events panning out? Do you think the EU meeting on June 27-28 could be an important trigger for the market?
A: I think it is a possibility. But generally speaking, there are different risks regarding Greece. Of course, the markets have now heaved a sigh of relief as the result sof the Greek polls dismiss the possibility of Greece leaving the EU.
But there is ongoing uncertainty and lots of risks round the corner. I am not sure to what extent the outcome of EU summit could help. It might indicate some signs of a road to recovery, but I think many Europeans, including the Germans, still think that Greece has a lot more surprises to offer. Q: Do you expect this to be a tumultuous week with the Fed meeting and the Spanish bond auction on Thursday? At the moment, the Spanish bond yields have risen above the 7%-mark quoting at 7.05. So could it be a very volatile week?
A: Yes, it looks like that. It is very likely that Spain now holds the biggest risk to stability in the EU. The Spanish spreads are still far too high and action needs to be taken on that front. This will now re-direct the attention of the financial markets pretty swiftly towards the bigger members of the EU. Q: What are you expecting from the Fed? Would you factor in a QE3? As yields continue to climb and Spain and Italy not doing too well, would you expect the ECB to implement a few initiatives?
A: First of all, all that the Fed can do at the moment, uncertainty in the strength of business cycle and unemployment in the US, is to leave the door open. I would not expect anything more concrete than that, but leaving the door open would be probably what can be expected at this stage.
The ECB will increase its focus further on potential LTRO and securities markets programme (SMP) rather than on interest rates. I think that with a Spanish yields above 7% and Italian yields going up as well, the risk of an unsustainable situation in some large EU countries is on the increase. So the ECB is expected to focus on security market purchase initiatives before this summer. Q: We had a decent rally across the risk assets before the election in Greece. Do you think most of the positives are now factored in and if the Fed were not to throw any surprises, this run could be over at least in the near-term?
A: I think this is definitely a risk with increased uncertainty in the EU, the US and large emerging economies and of course, the political situation in Europe.
So any disappointments, even in the rhetoric of any of the central banks, including the Fed, could definitely lead to more market caution in the short-term. I think there is a risk that this will be a volatile week and that central bank and political initiatives could add to this risk.