Global equities to resume rally in Q4: JP Morgan AMC

After the extended rally across global markets, Andrew Economos of JPMorgan AMC anticipates a pullback. However, he sees the equity markets to resume its rally into the fourth quarter.

There was renewed hope on QE3 after the minutes of the Fed meeting. According to Economos, any move out of either Jackson Hole or FOMC meeting will be largely symbolic. "They may make a symbolic move and continue to twist with this extension of maturities, trying to push down some of the longer term yields. They will continue to remind the market that they are watching the level of interest rates and the US economy, particularly the housing market. So it will be significant but it is more assuaging at this point, more so than actually QE3 or any significant plan." Here is the edited transcript of the interview on CNBC-TV18. Q: Are you seeing any signs of fatigue or do you think the kind of risk-on phase we have had for the last six weeks will continue for a few more?
A: I see the risk rally continuing, however, there will be a pullback. Technically, the trade looks like it is over extended; the rally has done quite well. We have an eventful calendar in September - political, economic and otherwise. As a result, it would give the market room to pullback and give it some breathing space. But I expect the equity markets to continue to rally into the fourth quarter. Q: What do you expect from Germany in the next few weeks? Do you think the Germans have come around to accepting the Bond Purchase Plan mooted by Draghi?
A: I think Ms. Merkel had her summer vacation, she had time to think about the issues at hand and finally understood them. She has realised Mr. Draghi at ECB was right and has decided to fall in line with the plan to save the euro and the eurozone. So yes, I do think there will be bond buying. Of course, we have got some constitutional court issues in mid September. But ultimately, Germany and the rest of the core of eurozone are committed to keeping the eurozone together.
_PAGEBREAK_ Q: When do you see the actual on-ground purchases of bonds commencing given that you believe that it has the tacit support of Germany now?
A: I believe what has happened now is that we have the summer lull in Europe where really nothing gets done in August, and then they come back in September with a vengeance. As a result, I think there is quite a bit that needs to be decided upon in September, and then I think we will start to see the ECB follow-up with actual bond buying.
Draghi has mentioned that there is conditionality around bond buying. He would like to see the governments take the lead. Merkel agrees with Draghi but they will all come together and basically start buying bonds, especially since the world starts slowing down now. Economic growth is slowing and even in Germany, economic conditions are weakening significantly. So it will give enough impetus and stimulus to the Europeans' core, and otherwise, to help the ECB with their plan to help stabilize the financial markets. Q: Last night, there was renewed hope on QE3 after the minutes of the Fed meeting. Are you expecting any concrete announcements as early as from the Jackson Hole meeting?
A: Any move out of either Jackson Hole or FOMC meeting will be largely symbolic. I think all the governors will agree to continue to be erring on the side of easing. I think they will continue to agree on a statement that they are weary of economic growth.
They may make a symbolic move and continue to twist with this extension of maturities, trying to push down some of the longer term yields. So I think what they will do, will not be significant. But they will continue to remind the market that they are watching the level of interest rates and the US economy, particularly the housing market. So it will be significant but it is more assuaging at this point, more so than actually QE3 or any significant plan. Q: Where does all this leave the euro-dollar? Is there more headroom in the near-term you think?
A: Technically, at first cut, the euro has double bottomed at 1.20 against the US dollar. So it looks like it is due for a bounce. But if we continue to see this risk trade catch steam then I think the euro may start to strengthen. Technically, it could bounce back to the 1.3 level, but at the end of the day over the medium to the longer term, the Europeans would like to see the euro weaker. I think that's where the market wants to take it.