Rally to die soon, US debts will spook mkts: Credit Suisse

Robert Parker, vice chairman, Credit Suisse Asset Management, says that the outcome of the fiscal cliff had a positive impact on global markets. Many European markets traded very sharply. However, he feels that the debt-ceiling agreement is still critical.

Also read: Why 2013 will see faster, stronger global growth Below is the edited transcript of his interview to CNBC-TV18. Q: What did you make of the deal contours and how long this trigger will last for global markets?
A: The initial market reaction has been positive. Most of the European markets are trading up very sharply. The German market is up 1.7 percent. Some of the more volatile markets which have underperformed in 2012 are up quite sharply. The Italian market is up over 2 percent. A similar picture can be seen in the foreign exchange markets with the euro close to 1.33 against the US dollar and bond markets are seeing a modest sell-off with 10-year US treasury yields at 1.8 percent to 10-year German Bunds at 1.41 percent.
This is the first day of European trading. So, the market reaction has been positive, however, the markets do face a number of challenges in January and February. If one looks at the deal that has now been approved by both the Senate and the House of Representatives which will go to the President Obama for signature later today, that deal does not address the need and fairly urgent need by the end of February to extend the US debt-ceiling, which currently is in excess of USD 16 trillion. It has not addressed the details on longer term spending cuts. So, it is a short term positive for markets.
Overall, the equity markets over the next three-six months globally and led by emerging markets will outperform other asset classes, but there is a real risk that over the next two weeks this equity market rally certainly stalls, if not reverses a bit. During January and February, we will see increased volatility and not a great deal of upside from where we are now in the short term. Q: Do you think markets will start fretting about those two issues that you alluded to – the debt-ceiling etc very soon and this could be a short-lived rally? You don’t think clarity will emerge in the next week or ten days on those pending issues?
A: In July and August 2011, there was a delay on agreeing the increase on the debt-ceiling. In July and August 2011 markets set back quite dramatically, in excess of 15 percent. The debt-ceiling agreement is critical and although treasury secretary Geithner had announced that he can impose emergency measures so that the US pays its bills during January and February, those emergency measures will run out of steam by the end of February.
The debt-ceiling issue is critical. I do think that they will agree to work to extend it, but it will result in market nervousness over the next six-eight weeks.
On the longer term spending plans, one needs to be skeptical as to what really rigorous cuts can be achieved and the big issues are the amount that is being spent by the US treasury on medicate and medicare and these are areas where there will be significant problems in coming to an agreement on spending cuts.