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Last Updated : Sep 03, 2012 12:21 PM IST | Source: CNBC-TV18

No chance of QE in September FOMC: Morgan Stanley

Gerard Minack, Morgan Stanley, says that I think that the Fed at the September FOMC will extend its promise to keep short rates low and we don't expect a quantitative easing at the September FOMC.


Gerard Minack, Morgan Stanley, says that I think that the Fed at the September FOMC will extend its promise to keep short rates low and we don't expect a quantitative easing at the September FOMC.


If we were to see QE3, then the Fed would prefer to wait until the December FOMC which is when its current Operation Twist expires and more importantly it is after the presidential election. I think that investors are looking for too much too soon from the Fed and the FOMC meeting could shape up as a disappointment.


Below is the edited transcript of his interview to CNBC-TV18.


Q: We did not see any material moves on QE3, but do you think it’s just a matter of time before the Fed does more of that?


A: No, I think there is still a live debate about when the Fed does something and what they exactly do. I think that the Fed at the September FOMC will extend its promise to keep short rates low and we don't expect a quantitative easing at the September FOMC.


If we were to see QE3, then the Fed would prefer to wait until the December FOMC which is when its current Operation Twist expires and more importantly it is after the presidential election. I think that investors are looking for too much too soon from the Fed and the FOMC meeting could shape up as a disappointment.


Q: What about expectations of more liquidity from the European authorities then starting with the ECB meeting this week? Are you expecting any big bang announcements of bond purchases commencing?


A: We expect the ECB to cut interest rates, which is a conventional response to weaker growth. The more important point is Draghi's promise to do whatever it takes to protect the euro. The trouble there as we read it that’s really contingent on countries such as Spain going to the European authorities and asking for a bailout package and that will activate ECB support.


Although the ECB has made its promise we think the ball is in the court of either Spain, most likely Italy, less likely Portugal to put the hand up. We also have the other risk issues such as the German Constitutional Court decision on Germany's participation in the Europe wide bailout mechanism, the ESM.


The information that I gather from my European peers is that there are 40% chances that the court either blocks German participation or will put some conditions.


That's too remains as a base case, the court gives it nod, but we do think there is material risk that the court decision is unsettling for investors. So the ECB meeting will get a rate cut, but really the next step in the process to get ECB buying of bonds is for the Spanish government to apply for a bailout package.


Q: Do you think the issues that you were talking about and their likely outcomes make the case for a continual risk on global markets more likely or do you think you have seen the best of risk on phase already this summer?


A: It is in the best of the risk-on phase; particularly in the US we think the macro will continue to disappoint and we think expectations for Fed actions are too optimistic and that is against the backdrop that we are expecting the earnings to fall a long way short of forecast next year.


My colleague Adam Parker who is the US equity strategist is expecting S&P earnings next year to be USD 99 per share and current consensus is USD 115. We think there is a risk of markets facing material set back in the US.


There are policy disappointments in Asia; weak news from China including PMIs, policy makers there continue to fall short of investors’ expectation for a policy response.


Europe is a bit blurring because if the ECB engage in large support for peripheral bond yields, there is certainly a prospective of idiosyncratic seeing credit risk rally in Europe. We don't think that it would spread to a broader global risk-on rally.


It would be a European specific event and it is one of the reasons – marginally more positive on European equities in a relative sense a couple of months ago, the prospect of policy response there.


Overall though, we are quite cautious on global equities between now and the end of the year. We think the summer time rally has just about run its course and we would start to look at how much downside there is in global equities.


Q: What do you think? How much downside? Do you think it’s going to be a meaningful pullback of 10% plus over the next few months or maybe the markets just grind in a range?


A: No, I think there is real prospect of a down tradable rally. In the US we are looking for the S&P to finish the year below 1200. That would be a tradable move. I think if the US did that we would see double digit percentage declines in global equities generally. Europe maybe relatively performer better if the ECB does unleash its firepower.


I think this is a tradable move. A downside risk for next year is the potential for the US recession. That's not our base case by the way, but certainly that would make it a more substantial downside move with it to unfold. We are more positive in Asia.


We think Asian policymakers have lagged expectations, but ultimately they have the ability to respond and that should mean for better Asian equity performance in a relative sense next year. Politics in Europe is very tricky. It makes it inherently difficult to forecast Europe even on a sort of six months time horizon.


Q: How do you think Asia will perform in a scenario where the S&P comes down even close to the target of 1200 between now and the end of this year?


A: I think Asia struggles certainly in an absolute sense. If we get an accelerated response from policymakers in the region, particularly China, it maybe that Asia ex-Japan equities can outperform in a relative sense, but if we write on our views on what may happen on Wall Street that relative outperformance really would just be a story of making smaller losses than elsewhere. So it's not at all a comforting picture for investors. We are very cautious on global equities for the balance of this year.


Q: What kind of global growth are you looking at over the next few quarters? If your view is that the US is just going to have very flat growth, Europe unsure, China still slowing at a pace more than expected. In the next 2-3 quarters what kind of global picture growth are we staring at?


A: We expect ongoing global growth to decelerate. This pattern is apparent for 12-18 months. The four quarter change in global growth has been decelerating from a 2009 peak. We have recession in Europe. We have very sluggish growth in the US, we have deceleration in Asia but Asia in absolute sense is still the strongest major economic block in the world.


Helen Chan China's economist does expect policy response in China, so we are looking for better growth become apparent by the end of the year in China. That is one of the reasons we look possibly for Asian equities to be out performers in a relative sense.


But overall this is a weak world and that is what commodity prices are telling us as we speak. Industrial commodity prices are very weak. The more worrisome sign is we are getting commodity price strength in energy and food but that is more due to supply side disruption all of which exacerbate the global headwinds the economies globally are facing.


Q: If you had to choose between asset classes including equities, bonds, commodities, gold everything what would be your preferred longs and shorts between now and the end of the year?


A: We still as a team like credit. We think credit gets the sweet spot between offering some yield, certainly better yield than a lot of sovereign bonds are offering you at the moment and also it does better when growth is slow, but positive.


So we like credit markets globally, then between equities and treasuries, I would have to say treasuries which obviously have rock bottom lower yields, at least they won’t go down in price in the global growth slowdown that we are looking. So our favorite short would be some of the high-beta equities and our favorite long would be in the credit markets. Gold is a quirky asset class.


I think gold looks very good on a multi-year view, because I do think ultimately it will end up more money printing and gold will respond to that. On a short-term view let’s see what the Fed does. Obviously if we are right and the Fed does not print then that may mean a short-term setback for gold, but ultimately I would buy the dips on the gold markets.



 



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First Published on Sep 3, 2012 11:05 am
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