European mkt consolidating; euro woes remain: SocGen

The last few weeks witnessed a thin rally in European markets and it has now entered a period of consolidation, Patrick Legland of Societe Generale told CNBC-TV18. According to him, certain political uncertainties in Italy and Spain may weigh on the markets but, the main worry remains the euro.

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Legland further added, "A fair value for euro would be certainly in the region of 115 and as you can see, currently euro is certainly overvalued by 15 to 20 percent." Here is the edited transcript of the interview on CNBC-TV18. Q: It appeared yesterday that the political woes will be taken in their stride by the markets but we are again seeing a dash of red on the European opening rates. What is the sense you are getting? Will the political troubles in Spain and Italy put behind, will it be overcome or do you think we are going to see some more profit taking?
A: We had a very thin rally in European markets in the last few weeks and right now we are just on a consolidation. I do not think the risk-on mood is at stake. It is more consolidation. Obviously, there are some political uncertainties both in Spain and Italy.
However, in Spain, we need to keep in mind that European Central Bank (ECB) is acting as a backstop on one side and in Italy, where the reform path is not at stake at all, the main question mark certainly for Europe is the euro. It is far too strong whereas on the other side, all currencies whether it is the US dollar, the Japanese yen or even the Chinese currency is weak and this is certainly a potential threat to the European recovery. Q: There is a converse view coming in with regards to the strength that we have seen in the euro, although that maybe in the long-term or maybe in the near term in 2013. It could be detrimental in terms of the fundamental progress of the euro zone because it would possibly constraint export growth. Is that something that analysts are now worried about or economists are worried about with regards to the strength on the euro?
A: Yes, we need to keep in mind that euro was created in 1999 at 116. Obviously, since euro has been appreciating a lot, it is detrimental for European export. It is very interesting and we have seen in the last few weeks many European leaders, political leaders started to worry about this.
We at Societe Generale consider that a fair value for euro would be certainly in the region of 115 and as you can see, currently euro is certainly overvalued by 15-20 percent. Yes, it is detrimental to the European economy. Q: How do you see euro's trajectory immediately for this quarter?
A: In the short-term it is very likely that the rally in euro will continue. On the other side, we can imagine that at some point European authorities will try to act, to stop the European rally on one side. On the other side, we at Societe Generale estimate that the US economy will recover sharply in the second half of the year and if we have differential in interest rates and growth in US versus Europe, obviously we could have US dollar strengthening, while euro would weaken. But, it would be only in the second half of the year. Q: Your opinion with regards to what investors are talking about with regards to the Japanese market as well as the movement of the yen. How much lower do you think that the yen could possibly go? Is there more optimism coming in with regards to the Nikkei, which is already sitting at four year highs?
A: There are many question marks on investors about Japan and Nikkei because on the one side, the Japanese currency has been weakening. That is very positive for the export-end of the market as we can see. But, on the other side, there are still many question marks on the policy that the Japanese central bank will take and also the government policy regarding the Japanese economy. Frankly, we are seeing a lot of investors who have more questions on conviction about Japan at this stage. Q: What would you watch out for by way of events? There has been risk-on, risk-off alternating and some of them have been fairly sharp like we saw on Monday, any important events, data points, triggers that you will watch out for in February?
A: I would say two things; we will watch the US economy carefully because if US does not recover, it will be very hard for Europe to recover as well. On the other side, we will watch out for the Purchasing Managers' Index (PMI) from Europe.