Sarah Hewin of Standard Chartered believes that there won't be any new announcements regarding making lending easier in the upcoming European Central Bank (ECB) meet on Thursday. She expects the meet to be focused on government to do more to rein in debt and stimulate lending to the small and medium enterprises.
She told CNBC-TV18 that European market is not looking for a rate cut, but the next big move can be a cut in the deposit rates.
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Below is the verbatim transcript of her interview to CNBC-TV18
Q: Can you tell us what exactly is perking up the European markets at this point in time and what are the key cues that we can expect in terms of Europe except for the European Central Bank (ECB) on Thursday?
A: I think the European markets are taken their cues from yesterday’s pick up in US stocks. Of course we have seen that follow-through in Asia as well, so some sort of bounce back having had lot of weakness in recent times.
So, the question is how far can it be sustained? We have had some relatively positive data yesterday from the euro area. I think that has helped as well in terms of the final reading of the manufacturing Purchasing Managers' Index (PMI) picking up.
Now tomorrow we have got the services final report. We will have a breakdown of euro area Gross domestic product (GDP). So, still some potential for positive news ahead of Thursday’s ECB meeting.
Q: How is Standard Chartered viewing the toing and froing on the Federal Reserve’s (Fed’s) move towards curbing this USD 85 billion of bond purchases? Is your view that it would start early enough?
A: We still remain cautious on that and I think a lot of market players really got a bit ahead of themselves. We had a reminder yesterday with the ISM Manufacturing survey from the US that the data may disappoint.
We know that the Fed is really very dependent at the moment, they are watching every release. Our view is that there is potential for weakness over the coming weeks and months as we see the impact of the fiscal squeeze, the sequester really starting to have an impact on spending and possibly on employment as well.
Q: So when would you at the earliest peg the Fed begin what one Fed member has called ‘recalibration’? Is that likely in the current year itself or may be in the next few months itself?
A: If you look ahead we have got Fed meetings in just over two weeks time, we have got the end of July and then September 18. Now June and July in our view looks far too early. We do think that we will see the Fed starting to taper its bonds purchases sometime this year.
We are probably in the camp that it is going to happen later in the year rather than earlier. However, certainly we think that the Fed will be prepared to taper Quantitative Easing (QE) for the next few weeks. So, we are concerned that we might see some softer data and this may leave the markets to reassess the timing of the Fed move.
Q: How important is the ECB meeting and what is your or investors expectation from it?
A: I don't think it is important this month as last month’s. Obviously in May we had the 25 bps rate cut. We had the ECB indicating what else they were going to do to try to stimulate lending. They are going to try to reinvigorate the ABS market.
So, this time around we think because the data seem to be starting to turn around we think that ECB will stay on hold. We are not looking for further rate cuts. The other issue of course is that the next big move would be a cut to the deposit rates. We know that quite a few council members would be very uneasy about such a step.
I think this Thursday, there won’t be any new announcements on making lending easier. Instead ECB is likely to focus on governments needing to do more to rein in debt and also to try to stimulate lending to the small and medium enterprises.