Investors nervous; euro likely to strengthen: StanChart

Like most market observers Sarah Hewin, senior economist, Standard Chartered also expects that there will be some sort of agreement between the White House and the Congress before the US debt ceiling matter is taken up on October 17.

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Speaking to CNBC-TV18, she says, as the US debt ceiling deadline is approaching, investors are now getting cautious. According to her, the money market funds have seen heavy outflows, which were halted for a short while following the US Fed tapering announcement.

Below is the verbatim transcript of Sarah Hewin’s interview on CNBC-TV18

Q: Do you think now the US government shutdown is beginning to worry investors because it is continuing for the fourth day?

A: There do seem to be signs that investors are getting nervous. Looking at the fund flow data assessments that we do each week, we can see that money market funds have seen heavy outflows. Investors have moved cash from short-term US T-bills. Emerging market bonds and equity funds have witnessed outflows. So, this is a resumption of the outflows that was halted for a short while following the US Fed tapering announcement. We have a period where risk appetite picks up again, but now with the approaching deadline of the US debt ceiling investors seem to be becoming more cautious.

Q: Do you expect the debt ceiling to be breached at all? Can you just delineate the scenario? It brings bond markets to a standstill, is it as bad as a seizure that we saw after Lehman?

A: The US Treasury Bond is the world's risk-free asset. So, we would be moving into uncharted territory if we did get to a situation where there was no increase in the debt ceiling and the US was unable to honour its obligation. It could be akin to a Lehman type of moment. Most market participants anticipate that before we get to that stage there will be some sort of agreement thrashed out in Congress, but the longer the impasse continues, the more concerned are investors likely to get.

Q: Should we worry about how emerging market debt and currencies might behave? After all they are still the risk assets. If the impasse continues up to the nth moment how would emerging market assets react?

A: What we tend to see in periods of stress is that investors move to safe havens. Interestingly, safe havens are usually treasuries, but they can also be Swiss francs, gold might well do even better.

Q: Is euro also a safe haven then?

A: Euro has certainly had a bit more green light from Draghi. It is interesting that we anticipated that Draghi on Wednesday would have warned about euro strength, but he did not signal too much concern and merely said that it is something that they would continue to monitor. So, we have seen euro edging up now 1.3622.

Euro would probably gain further strength with a combination of no agreement in the US and the European Central Bank (ECB) apparently not yet ready to take action to stop its strength. Like most market observers, we expect that there will be some sort of agreement between the White House and Congress before we get to the October 17.