Greek bailout new fear factor, fed tapering done deal: RBS

The European markets are eyeing the Eurozone meet over bailout to Greece far more than the Fed tapering the monetary stimulus believes Michael Michaelides of RBS.

In an interview to CNBC-TV18, Michaelides says that the uncertainty over whether the Eurozone will provide another bailout tranche or not is now keeping the market on its edge.

"Any sort of delay here (in the bailout) will mean further escalation and further fears on the progress of this bailout. The markets are focusing on this, the tapering discussions and the minutes coming out on Wednesday by Fed," he adds. Below is the edited transcript of  Michaelides’ interview to CNBC-TV18. Q: How are European markets themselves placed? Have they put behind any fears of tapering? Is that factored in? Are they looking forward positively to what might emerge from Brussels?
A: I think the markets today are focused not just on the tapering discussion where the main thing will come out on Wednesday regarding the minutes, but I think they are also focused on the Eurogroup meeting on Monday. There are fears here over delay in the Greek loan tranche where we have seen conflict reports as to what is likely to happen here. Any sort of delay here will mean further escalation and further fears on the progress of this bailout. The markets are focusing on this, the tapering discussions and the minutes coming out on Wednesday by Fed. Q: What is your sense for the rest of this week? Assuming Greece is able to get some deal with its three major creditors do you think the market will behave as if it has taken the tapering discussion now for the moment or do you think after this the market will start worrying about tapering?
A: A lot of speakers are trying to lay the markets’ fears and that is also what the European Central Bank (ECB) did last week by trying to clarify exactly where the policy remain accommodative and try and provide some guidance on the way it will be in the future. They are trying to takeaway the risks coming through the Fed and coming through the tapering debate and we have seen that in the market prices also. That is which is why the selloff to a certain extent start to abate when you saw greater and greater Fed speakers telling you that, yes we are tapering but that does not mean that we are going to immediately hike afterwards, they are trying to make this distinction and the markets are interpreting this in that way which is why the selloff has not exacerbated as much as it was three weeks ago.

Q: The biggest barometer offlate of the risk aversion across markets is the US 10-year bond yield and the way it has surged above that 2.7 level. Do you anticipate higher levels on the US 10-year bond yield? We do have a treasury sale on Tuesday that is tomorrow and there is a risk of a further spike in yields.
A: Before the Fed minutes, one is likely to see a grind higher in yields which is mainly driven by the positive payroll numbers seen on Friday. So, the initial assessment is going to be higher on that basis, but we need to see further clarification in what happens on Wednesday, because I think what we saw after the last Fed meeting is that the market reacts very hawkishly to what was the Fed press conference and what Bernanke said. However, post that we saw a lot of Fed speakers and they were actually trying to make a greater distinction between just tapering and their eventual tightening of policy. If the minutes are really fleshed out then it appears that the tapering is no big deal, it is not as big a tightening that the market is concerned about than what one may see after the late Wednesday session and afterwards on Thursday. Q: What would you give by way of euro-dollar value? It does not dip below 1.28? Where are the supports coming and what could be the range near-term?
A: It is driven by the dollar side a lot, but the market also seemed to be weakening. There are reports saying that the ECB was much closer to cutting and for that reason we could see it move on the euro side as well not just driven by the Fed. Q: Do you think emerging markets (EM) are in anyways exposed to the danger of funds deserting them? Tapering is a matter of time and intensity, but it will happen.
A: Yes. I think we have seen some stabilisation in EMs. However, if one looks at the average level of 10-year local currencies, they are 100-150 bps wider than they were at the beginning of the tapering discussion. This is where the impact of tapering is going to be. It is not about US tightening in this case. It is about the additional liquidity in the system. That is where one will see funds removing their money from EM investments and that will affect the yields in those currencies, so on that basis we are worried more than we would be for the developed markets (DM).