ECB move won't impact global mkts much: George Hoguet

Below is the verbatim transcript of Michael Every and George Hoguet’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: The European Central Bank (ECB) in a sense has disappointed global markets and we are seeing it in the US markets and even in Asia this morning. How would you read into the event?

Every: I think it just symbolises or exemplifies the fact that we live in farcical financial market at the moment which is best summed up actually by the Financial Times printing the wrong ECB announcement a few minutes before the announcement and having to retract. At the moment, no good deed goes unpunished. ECB has attempted to try and be more moderate than perhaps they could have been, not actually increase quantitative easing (QE), just extend QE still making a further rate cut into la-la land negative territory but overall relatively being quite moderate.

What happens, the stock market drops 3.6 percent and bond yields jump 20 basis points. The problem is really that in these ridiculous financial markets, if you are rational the market completely reacts irrationally.

Latha: For emerging market investors who are now trading at this hour, is the ECB event not so terribly important? Would they have their eyes cocked more on what Yellen said and is therefore likely to do on December 15 and 16?

Every: No, I think they are both important because effectively Yellen we know is going to be the Grinch who stole Christmas by raising rates and that is absolutely going to be happening. However, at the same time the ECB, everyone expecting them to be Santa Clause and throw more liquidity into the market and that is why they disappointed. Bank of Japan (BoJ) has not done it, the ECB has not done it and the Fed is going to be doing the opposite. So, if you put those three together at the moment, temporarily, everyone is behaving like an adult and markets do not like it when that happens.Sonia: In a sense now it will be the end of that easy money or free money period. Given that situation do you expect money to be pulled out of emerging markets in the next three to four months if it hasn’t been already?Every: I think that is too long a timeline to talk about because to be quite honest we are still in an incredibly easy money environment. We are only talking about not making it even easier which underlines just how crazy the situation is. It is not that we are actually reducing how easy it is, except maybe in the US which is not making easier and for emerging markets three-four months is a long time.If we continue to see the euro push higher, if it continues to push up 1.10-1.12, let us just presume that happens, I wonder how long it will be before the ECB has to turn around and say the market has forced us to be even more ridiculous and we will extend QE. So, four months, an awful lot can happen in that particular time.Latha: How do the events of the announcements from the European Central Bank (ECB) and Janet Yellen's testimony yesterday square things for the way money will move, do you think that we are going to see more money being abandoned emerging markets, do you think the dollar will get stronger?Hoguet: The events of the past two days have not fundamentally changed our view of the world. We do think that the dollar will continue to strengthen that many emerging market currencies will continue to weakened and in fact the euro will continue to weaken over time given the differences in the economic fundamentals between the United States and the euro zone. So while there was disappointment clearly, the markets were surprised and the ECB's decisions, we don’t believe that this fundamentally changes the underlying dynamics that work in the world economy.Sonia: For the last six months the emerging markets have underperformed the developed markets because of a variety of reasons, do you expect that trend to continue?Hoguet: The reasons for that is that we believe that the Fed funds rates will be a probably 1.25 percent by the end of next year that means the 10-year will be close to 280 or so and differences in yields between the United States and emerging markets are narrowing but more importantly I would say that a number of emerging economies are not engaged in fundamental structural reforms. So we see this in Russia, we see this in Brazil, which is undergoing a very difficult period now and I think there is more confidence in the policies in the developed markets and emerging markets.Latha: We saw the euro become expensive from 1.06 even 1.55 before the ECB announcement to 1.09 at this point in time. Do you think that it gets even more expensive or do you think after mid-December when the Fed action is known, we could end the year closer to 1.06 on the euro?Hoguet: Yes, I do and if you look at Europe and think about the multiple challenges that it faces there are good reason to believe that might be the case. Let me go through some of the things that Europe is facing. You have Greece now continuing to struggle and in non-compliance wisdom -- its most recent bailout of course you have the refugee crisis, you have continuing security problem in Ukraine, you have high debt levels and weak growth continuing in periphery, you have the vote Volkswagen crisis, there are a lot of reasons to believe that the euro will weaken.