End-of-slowdown signs emerge as volatility fear rages

Unicredit's chief economist for the euro-zone Marco Valli explains to CNBC-TV18 that though there is an outbreak of protests across Europe, the signs that the slowdown might be receding have begun emerge from data such as the manufacturing PMI. Valli dispels any near-term threat from the protests but advises that the protests be observed over the next two-to-three years.

Below is an edited transcript of the analysis on CNBC-TV18. Q: How are things panning out this week in the European markets?
A: From a macro perspective, we should get used to these fears of volatility when we have news from the peripheral economies, although the trend will remain constructive. I think most of the rally, particularly in the fixed-income markets, is over given that sovereign curves now are much closer to fundamentals than they were a few months ago.
The markets are now looking carefully at risks from the political arena. The recent data indicates there is some room for tentative bottoming out of the recession. So, not everything is going bad in terms of real economic activity in the euro zone. Q: What are you watching out for in the in the near term from Europe?
A: The ECB meeting is slated sometime during this week. And although it is going to be important, I think Draghi will not make any major announcement. The ECB will consider the effects of the recent easing in the financial market tensions and will be express confidence that the easing of these tensions will be positive for further growth in the medium-term.
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So, the ECB will acknowledge that though the recession continues, there are prospects for improvement in the next few quarters down the road.
In terms of data in the euro zone this week –the manufacturing PMI which was slightly upwards and though it is still recessionary, indicates signs that the pace of recession is slowly starting to bottom out. So though negative growth could be expected to continue in the final quarter of the year, we do expect to see stabilisation at the start of 2013. Q: There are expectations in the market that Spain will ask for a bailout in October. Do you expect that to happen?
A: Actually, we do believe so, although the timing will most likely depend on the regional elections on October 21. We think that if market tensions do not significantly escalate, Rajoy will probably want to wait for the regional elections before going and asking for help.
But since the decision is market-driven, I would not be surprised to see Spain asking for support in the government bond market before the regional elections on October 21. Q: Do you think the movement towards regional autonomy might postpone this bailout demand to some extent?
A: Not really. This kind of popular protest and request for independence is certainly a reaction to harsh conditions. Let's not forget that Catalonia recently asked for government support.
This is not a threat in the near term, but is something to watch very closely over the next two-to-three years. This falls under the broad political risks in Spain and Italy.