Europe woes affecting mkt; may see volatility ahead: SocGen

The euphoria over the ECB's bond buying programme and a third round of quantitative easing or QE3 from the US Federal Reserve seems to have worn off and global markets are seeing some concern. Patrick Legland, Global Head of Research, Societe Generale summed up the mood and said, "The market now is back to reality."

Legland explained, markets now are aware of the fact that monetary stimulus in the form of QE3 will not have a lasting impact on the economy. Moreover, concerns over Spain and Greece is also worrying global sentiments. All these provide little support to the market and moving ahead, negative news flow is likely to affect the markets, he believes. If the market witnesses some volatility, investors may look for safe havens and park their money in gold, added Legland. Also read: Euro zone worries send shares lower
Expect global market consolidation in Oct: JPMorgan Here is the edited transcript of the interview on CNBC-TV18. Q: Essentially negative cues coming in from Europe, there is worry about Spain, we also have the IMF report released yesterday saying the situation globally remains that of concern. In this light, how do you see the markets performing, it seems that euphoria over QE3, the ECB impact all seems to have worn off for the time being?
A: Yes, I think you are absolutely right. The market now is back to reality. First there is global understanding that QE3 with this USD 40 billion stimulus every month by the Fed will have little impact on the economy. We need to keep in mind that QE1 in November 2008 with USD 1,400 billion and QE2 in August 2010 with USD 650 billion had a very strong impact on financial market but, at the end of the day it had a relatively low impact on the economy. That is point number one.
Point number two is the worry about Spain and Greece. In Spain, the government deficit would remain in the region of 5 percent in 2013, it should be significantly above 2 percent and debt to GDP would be also in the region of 100 percent. If you take all this into account, the market has very little support at this stage, maybe except liquidity but that is not enough. Q: Going ahead also concerns remain if you get in the US as well. That’s heading into earnings season and election. So some amount of caution, volatility expected on that front as well and you mentioned Spain and Greece remaining one of the concerns in the Eurozone. Specifically, does this bearish sentiment continue and if so for how long and also do you see the move towards gold increasing in the time being?
A: The news flow is likely to be very poor in the next few weeks. If we take Europe, earnings consensus is still looking for more than 12 percent EPS growth in Europe for 2013 whereas it’s minus 2 for 2012. Obviously this is where exactly the situation in the US is. In the US, EPS consensus for 2013 is roughly at 11 percent versus only 6 percent for 2012.
Then we will have earnings downgrade on one side and investors are looking for a safe haven. This safe haven might be either corporate yield on the shortened on one side or gold on the other side. We have to be ready for the additional volatility as we approach a very important time for Greece and Spain.