Big-bang Nov on hope of aid to Spain, Greece & US polls:RBS

Michael Michaelides of RBS explains to CNBC-TV18 that the increased likelihood of Spain asking for ECB aid, Greece being allowed the next tranche of aid and the US polls will occur simultaneously by the first week of November. Michaelides adds that the European markets have already priced-in the intervention of Draghi to assist the Spanish bond market.

Below is an edited transcript of the analysis on CNBC-TV18. Q: Are you worried about increasing reports of trouble brewing in Greece, the IMF adopting a very tough stance and its financial stability report revealing a few rather worrying indicators? What is your view on Spain? Do you see the country asking for bailout in the near-term?
A: I think on the Greece situation, the interpretation of Angela Merkel's visit is actually positive. We view this as an indication of political support from some of the core countries that the next bailout tranche to Greece will most likely be paid.
With regards to Spain, in terms of bailout, the critical point is that it needs to ask for the bailout via the Outright Monetary Transactions (OMT) or ECB bond-buying. We do not think it will come before the crucial EU leader summit on October 18-19 and also in terms of the consideration that Spain has regional elections on October 18 and then the crucial Catalan elections on November 25.
I think most likely we will see the request for help being forced by the market will be forthcoming from Madrid after their regional elections on October 18. So there will probably be some political indication at the end of the month and the terms ending voting in other parliaments of Europe will take place in November with regards to the Spanish request to help. Q: Are you expecting Spain to ask for a bailout after the regional elections?
A: Definitely not before the EU leaders' summit and probably after that it's increasingly likely they will ask for help. One of the main obstacles for them to ask for help is the growing opposition from Berlin on the request for further help after having approved an aid programme for Spanish banks.
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So the discussion is in the market that potentially the packages in the German parliament for Greece and Spain will be passed all together in November. So that would tie-up well with our belief that the request for help will come in November. Q: The market is very quick in factoring these things in. Why isn't there any kind of pressure on yields at this point? If you look at the Spanish yields, they are not at very alarming levels that the government would be uncomfortable with and that's leading to some statements from the polity that if yields the rise they could ask for aid. So why is the market not pricing that risk in at this point?
A: I think the market does take into consideration the risk - the underlying pressures which will lead Spain to ultimately need the request for assistance also the market is taking into account the potential for ECB assistance and if Spain does ask for precautionary programme they will potentially get also assistance in the primary market from the permanent bailout fund in the ESM.
So the market, on one hand, is concerned about the long-term issues of Spain which is why the yields are at the elevated levels they are. But they haven’t reached the levels seen earlier in July or June because the ECB has increased its presence. So the market is almost saying that if the levels fall, Spain will eventually yield and request for the assistance package which will bring in the ECB. So to some extent, the markets is pricing in some Draghi spurt that the ECB will come in to assist the Spanish bond market. Q: Do you expect these Draghi-puts in Rome to continue?
A: I think it could be that some of the requests were not forthcoming at the summit. We could get increasing market pressure and we also see that the market pressure is likely to be focused on the longer end of the curve beyond three years because if you remember the currency programme, the bond-buying coming from the ECB is only allowed to be focused on the first three years of the Spanish curve. So if you see pressures on the longer end of the curve, the ECB cannot support the market. Q: How are you expecting fund flows for the last quarter of the current year? Would they continue to stick with the developed markets? Are you expecting them to migrate a bit from the developed markets? What would be perhaps the top three assets chased in terms of equities?
A: The European equities picture is absolutely critical. We have to see how this summit plays out and the Spanish request for help also the broader picture for Greece. I think if it comes obviously the Greece will receive the tranche and if negotiations proceed smoothly, that could be big positive. But we have to wait to see the impact of the elections in the US. So, there are very many factors which are coming to play in the last quarter of the year.