Chances of snapback euro rally unlikely: Henderson Global

Christopher Palmer, Henderson Global Investors, says that today, investors will be looking for a green light from the politicians for the bond purchase program. Skeptics will look for more indications that structural reforms in Europe are also on the agenda or have been agreed to behind the scenes. So, in other words, the weaker countries get bond purchase, but stronger countries get a string indication that structural reform has not been left behind.

Below is the edited transcript of his interview to CNBC-TV18. Q: What expectations do you have from this ECB meeting?
A: The expectations around the ECBs announcement today are quite critical for emerging markets because this is been causing the risk on, risk off tug of war in markets over the last year. The expectations from the markets are quite high that Europe will use this announcement today to indicate that a bond purchase program of some significance is entered into. Q: If something doesn’t come out today from the ECB which is extremely constructive for the markets, do you think that we are set for a quite a strong sell off in the European markets or do you think we will wait for the non-farm payrolls data from the US and then figure out whether there is a possibility coming in, in terms of quantitative easing from the FOMC?
A: Investors now have reached a point with Europe where they are less certain that plan B which involve the US injecting more liquidity and better numbers from the US alone being enough to set the markets in the right direction again. Now, there is large distortion in the European bond market that Europe’s own solutions are required at this point.
Today, investors will be looking for a green light from the politicians for the bond purchase program. Skeptics will look for more indications that structural reforms in Europe are also on the agenda or have been agreed to behind the scenes. So, in other words, the weaker countries get bond purchase, but stronger countries get a string indication that structural reform has not been left behind. That will satisfy many parties, and in particular, it is absolutely critical for sentiment in emerging markets to recover this year.
Based on its own data the US has done well this year. So, I don’t think the US markets are in much jeopardy about these European announcements, although there would be some contagion there if it is too disappointing. The real issue is; will Europe get its act together? Q: So, in effect what kind of an immediate upside are you hoping to see if Mario Draghi comes out and says that he is willing to buy further bonds if there is a cut in the refinance rate that people are expecting and if he also says that he might wait for the German Constitutional Court to sort of ratify the ESM and then go ahead with bond buying. What kind of an immediate upside do you hope to see in global markets?
A: I am not sure about the immediate returns. But investors looking with a time horizon of six to twelve months then they should see markets like Brazil, China and BRICS markets closing the gap with regards to some of the stronger markets like the US. The BRICS markets in particular are either flat or down year to date.  There are chances that you will see some convergence in markets with some of the laggard markets catching up. Q: Does India feature on that list as well?
A: Yes, India has some of its own issues. It has got its own ECB crisis going on within India. In these markets much of damage has been already done. Some stronger European markets is up 15-20% year to date and some of the weaker markets down 10% or 15%, you should start to see those gaps close pretty rapidly based on performance of financials. That will spill over into some of the larger markets. We will anticipate Brazil being a beneficiary of that, but also because of some concerns from China about Europe you could start to see a bit on the China as well if Europe can pull this off.
For investors the implications are that, some of the laggard markets will start to close the gap on performance with the leading markets. Q: What do you think the euro is factoring in at this point in time?
A: The euro is a group of currencies that are all linked to each other and although it has been recovering in recent weeks some of the positive implications for the bond purchase program, and what it might mean for the weaker countries is determent of the stronger countries which in effect are going to be subsidizing these activities. So the Europe is probably now pricing in a muddle-through with some quantitative easing and very real monetary impact on the value of the euro that too much money creation via quantitative easing program might entail. So I think you won’t see a snapback rally in euro, but a thriftier as it has been doing over the last six weeks.