Euro rally tradable but prefer $ longer-term: Ashburton

The European Central Bank (ECB) Thursday extended the stimulus programme from September, 2016 till March, 2017 and cut interest rate on deposit facility by 10 basis points to -0.30 percent but did not increase bond purchases. Soon after the news, the European markets started correcting, which could be because the market was disappointed with the 10-basis points rate cut, says Ipek Ozkardeskaya, market analyst at London Capital Group. The market had expected a rate cut of around 20-35 basis points. Moreover, the ECB commentary too was somewhat dovish, she says in an interview to CNBC-TV18.Agreeing with Ozkardeskaya, Jonathan Schiessl of Ashburton says that the decision was bit of a disappointment and could create more volatility in the market, he adds.However, with the euro strengthening against the dollar post the news, Schiessl thinks the counter trend rally in euro could be tradable but he prefers the dollar over the longer-term. However, one could see a shift back from European equities into US equities, he adds.ECB Chief Mario Draghi in a news conference said, it did not add to its monthly asset purchase programme because extending the scheme and reinvesting proceeds were deemed sufficient. "Our asset purchase programme is flexible. It can always be adjusted. We decided the extension of our horizon and especially the re-investment of principal would be sufficient," he said.Below is the transcript of Jonathan Shiessl and Ipek Ozkardeskaya’s interview with Surabhi Upadhyay on CNBC-TV18. Q: Your first thoughts on the very savage market reactions playing out. Even Wall Street has turned negative. We have seen how stocks have nose-dived across European equities and this massive euro rally that is under way. What do you make of all of it? Ozkardeskaya: Actually the market was prepared for a big action, and the European Central Bank (ECB) action has been much less dovish than the market expectation. So, Mario Draghi is just contented with an extension of the quantitative easing (QE) from September, 2016-2017 and absolutely not added a percent of euro 15 billion extension on monthly basis. So, this has been a disappointment. On the other hand the expectation for the rate cut was mostly around 20-35 basis points, it has been only 10 basis points. So, there has been some dovish moves from the ECB but, much less than expected. We can see that the market has not been very keen on the news, the DAX and CAC are 2.75 percent lower. I can see IBEX minus 1.65 percent. European sovereign yields are up by 20 percent in Germany, Italy Spain and Portugal. So, the market has not been very happy about what happened. However, this does not mean that the ECB is not accommodative. ECB is still playing on the dovish side of the game and we are sure that it will continue to be supportive of the market until it is not necessary anymore and until the two percent goal is reached. Q: Is this just a knee-jerk reaction that is playing out which means that it will be over in a couple of days or hours or do you expect this to now translate into some kind of a more meaningful correction? Schiessl: I think clearly, I guess the biggest disappointment for us is that you could argue over the last two or three weeks, the ECB with its quite dovish speaker, over the timeframe has certainly shifted analysts views quite substantially that there was going to be some reasonable action from the ECB. So, I guess that is where some of the disappointment lies. Clearly looking at the charts and some of the moves are some pretty big counter-trend rallies underway. This could last for a little while, but we were certainly expecting a bit of increased volatility. It is a very central bank heavy month. Q: What is your sense on the euro? This is a major reaction playing out. We are looking at levels of 1.08 now. Do you expect more strength to continue? We got a view earlier in the evening saying that this could all the way up to 1.1. Scheissel: You could easily see a technical reaction here. Generally speaking we still do prefer the dollar on the slightly longer term view, but certainly on the short-term you could see quite a counter-trend rally that there could be, certainly a tradable counter-trend rally at that. Q: What is your sense on the way equity markets are behaving? Do you expect cuts to get a little deeper, particularly in the way the European markets approach this decision? Ozkardeskaya: that the reaction has been an overreaction, I do not think that equities will be under heavy pressure because once again, the ECB continues to be supportive of the market and supportive of growth. So, we have not seen any tightening. We have to mention that. And it is just about market expectations that have not been met, so from here we can still see that on the European sovereign markets, we still have this heavy distortion with negative yields that they should not be negative. So, this means that there will still be some catapult flows into the European stocks in order to have more risk, a more correct risk to return perception in the portfolios. But I do not believe that the downside is where we are going to be heading after the ECB decision. It has not been negative.