Markets indicate ECB bond plan will go through: StanChart

Manpreet Gill of Standard Chartered says the bond markets are indicating that bond purchases will be made. The yield on Spain’s 10-year benchmark bond fell one basis point to 5.8 percent yesterday in Madrid, compared with an intraday record of 7.75 percent on July 25, a day after Spain signed a document fixing the conditions for the bank aid.

“As long as Spain and Italy are able to raise funds without assistance, they can go ahead and delay asking for assistance. But if yields were to rise, that would put more pressure on the governments to actually go ahead and request that assistance,” he told CNBC-TV18 in an interview. Also read: Not much expected from EU meet: Port Shelter Investment Back home, Gill said, the recent government reform push is likely to boost investor sentiment. “I think the sovereign ratings will now depend on fiscal consolidation steps,” he said. Below is the edited transcript of the interview with CNBC-TV18's Q: How do you think the markets might react when the aid is actually asked for, by Spain? Now it seems to be touch and go. Would the rally peak off? Or do you think there could be a further boost to the rally as stability returns? A: An actual request would be positive. To some extent what the bond markets are telling us is that they have priced in potential bond purchases by the European Central Bank (ECB) and the European Stability Mechanism (ESM). The point we have been making over the past few months is; this does actually need to happen. We need to follow through with the request, the actual bailout funds, the conditionalities and the acceptance of those conditionalities, before we can actually get to the bond purchases. So we think if it happens it will be positive. We are just concerned about whether we may end up with volatility, before we actually get to that point. Q: What is the market expectation of when this would happen? How much timeframe are they looking at?  A: It is a question of "when" that Spain needs to ask. The irony is that with lower bond yields there is less pressure on Spain to go ahead with requesting assistance than if bond yields were at 6 percent or higher. So to some extent it can be self-fulfilling. As long as Spain and Italy are able to raise funds without assistance, they can go ahead. But if yields were to rise, that would put more pressure on the governments to go ahead and request that assistance Q: How are you looking at the liquidity flow that has come into a lot of risk assets in the past 8 or 10 weeks ever since QE3 became a reality? Do you see that flow getting exacerbated? Do you think the rest of 2012 holds a significantly higher gain; 10-15 percent for most of the risk assets? A: Perhaps not so much in the short-term. We are actually concerned about the reverse. If one looks at the interest rates, equity prices or asset prices, the evidence we have from past episodes of QE is that markets tend to price the QE. Ahead of the fact and tend to sort of reverse after the fact. We have seen that already occur with a number of US assets. And if anything in the short-term creates more of a concern, we actually see a risk for correction. A lot of the Fed policy has been priced in and we have not really received the next round of boost either from the ECB or from substantially better economic data _PAGEBREAK_ Q: How are the investors looking at India after the recent kind of rally and the phase of consolidation that they are currently in the Indian equity markets? Are they looking at after this consolidation Indian markets are likely to move higher and hence perhaps we should invest cash in the equity markets or do they see Indian markets topped out? A: In the short-term, there is a risk again. Playing along exactly same theme that there has been some good news from the policy front, which was a major constraint, markets in the sense had responded to that in the short-term. These policy measures are a positive. If one is a relatively long-term equity investor, then it is definitely a positive. Long-term investors should be positive about India. We are just concerned that in the short-term some of those policy initiatives may have been priced in. We would look to some sort of correction from where we are before we look to continue to average in, which we would if there was a correction. Q: What kind of Sensex or Nifty levels would you say is possible before the financial year is out - say March 31 or December 31, however you want to set a timeframe. Would it be like 10-15 percent gains or at least 5-10 percent gains possible from current levels and what would you really expect from the government to allow this to happen? A: One very important measure is in terms of what government policy action is taken on the fiscal front. We have seen some efforts in terms of policy initiative on the growth side, but what is critical particularly for the sovereign rating is what measures are taken on fiscal consolidation. That's one factor that the investors are definitely paying close attention to. Second is in terms of Sensex itself. We do not think in terms of targets on the upside, but more important question for investors maybe to what extent of a correction would you want to see before you look to average in. If equities are 5-10 percent lower, we would be quite happy to use that to average in to sort of build up to add to our India exposure. We still have a neutral view relative to the region, but investors should be using weakness if we see a need, to average into equities. That argument holds in Indian equities as well.