Greece woes and Chinese stock market crash have made global markets extremely volatile which is why there is a possibility of a Fed rate hike, says Nick Parsons, Head of Research, UK and Europe, National Australia Bank. He sees a postponement only if volatility is contained.
‘If markets calm down we get expectations of a rate hike coming on the surface and if markets remain volatile then those rate hike expectations disappear,” he explains.
Speaking to CNBC-TV18, Parsons says as the Greece crisis approaches an end game, it is likely to impact asset market negatively. Speculating a possible Greece check-out from Euro Zone, he says the currency, stock and credit markets are turning gloomy on the back of ‘substantial falls in the futures market’.
Below is the edited transcript of Nick Parsons' interview with Latha Venkatesh and Sumaira Abidi on CNBC-TV18.
Latha: It is good to see some bit of green on the screen you think or is this just going to be a temporary oasis?
A: It feels temporary at the moment and the mood in Europe is quite sombre and there is a feeling that we are very much approaching an end game for Greece, which is unlikely to be positive for asset market. There is a feeling that Greece could well be effectively ejected from the Euro on Monday of next week and that is leading to quite a gloomy mood in credit markets as well as in currency and in stock markets more generally. Although you are seeing a little bit of green on the screens in some of the European indices, this comes after substantial falls late into a closing in futures market last night.
Sumaira: Do you think this possibility of this eventuality like you see it has been priced in already, how much further could the markets head lower from here upto Sunday?
A: I don’t think that it has been priced in, up until now, the general consensus would be that Europe will do what Europe always does best and that is to say come up with a compromise as such and buy some time and agree to revisit the issue in 9-12 months. It does seem though that finally and decisively Europe's collective patience has indeed run out and this is a surprise.
If you look at some of the language in comments from the former Luxemburg Prime Minister Jean-Claude Juncker for example, he has been the most pro-European of all Europeans. Even his language last night was especially downbeat and he was the one who set that new Greek finance minister 7.30 pm Friday deadline so it does seem to be exasperation at the moment and that is something that had not been factored into asset prices.
Latha: Should we worry more about Greece or should we worry more about China in terms of contagion impact on risk assets?
A: I would say both and what is very interesting here has been the reaction in US interest rate markets. For those people who are expecting the Fed may have been able to tighten in September, I would suggest looking at the Fed funds futures market, which is currently only indicating a rate at 16 bps which is clearly not compatible with 25 bps rate hike but again if you look at the December contract, the December contract is at a record low at the close last night of just 25.5 bps and once again if expectations were that the Fed would only delay for three months then you would expect that to be quite a bit higher when it closed last night at the record low.
So what we are seeing is that the markets collectively are looking at both Greece and China and saying this is going to crimp the Fed's room for manoeuvre and that we might therefore still be in for period of volatility because we have the situation here where if markets calm down, we get expectations of a rate hike coming into this and if market remains volatile then those rate hike expectations disappear. So the choice appears to be volatility or volatility and that is going to be fairly uncomfortable background for December.
Latha: Finally you spoke about that terrible possibility by next weekend that Greece might indeed not be part of the European Union. Give us an idea of how financial markets may look then Monday onwards or even in the run up to Monday, will it be an attack on peripheral corporate debt and generally on commodities will it be a growth scare?
A: The answer is it is going to be all of those we would expect that corporate credit spreads would widen, there would also be quite a lot of volatility in sovereign bond markets because if Greece were indeed to leave then 189-199 billion Euros that Greece owns will be written off, it will never be repaid. So that debt will have to be assume by the European Central Bank and by the national parliaments across the euro zone.
So people who believe that they have been buying safe haven bonds, sovereign bonds might themselves begin to have some grave doubts about the bonds, which they are buying because that 189 billion of debt will have to be written off and that will completely mess up with debt to gross domestic product (GDP) metrics of many of the sovereign bond markets across Europe. So I am afraid at the moment there are very few places to hide from this.
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