See limited Greek impact on Asia, stronger euro: Lakefield

Ekta: What is your sense in terms of what the way forward might be for the European markets? Is the entire week going to be as weak or volatile as it is today?

A: I think for sure, volatile , whether it is going to be as weak depends a lot on the political development of the next few days. The markets are bit taken on an emotional roller coaster, because from minute to minute there is news coming in. It is clear at this stage from the official side that they want to keep Greece within the Euro Zone. It only depends on how they will succeed in doing so because there are different parties, stakeholders that needs to be looked at. One is the International Monetary Fund (IMF) which seems to have a bit of a different opinion and the European Central bank (ECB) and the European countries.

They need to find sort of a compromise amongst themselves and then see how that can be sold to the Greek public. What the European Union seems to do at this stage is to stand above the democracy and the Prime Minister and try to see and how far they can convince the public themselves to stay within the Euro Zone.

Mangalam: In case a compromise is reached, how do you think the market is panning out and do you think the fears of a Grexit have been priced in in the fall currently?

A: I think it is. What needs to be done and that is going to be decided and that is not really clearing it is how much Greek impact is going to be on the country that involved themselves. If we look at the numbers in Germany, they are quite big and even to the gross domestic product (GDP) we are talking two and a half percent GDP impact over the years. The question is how far that is going to impact the economic development going forward and that is not clear yet.

Ekta: Tell us about the German ten-year, because that seems to have softened quite a bit from the levels on Friday. What is the expectation in terms of how much further the German bunds can possibly soften and where the euro could go as well?

A: On the bond yields, the reaction is actually quite modest. I believe that if the ECB has the bazooka that this is the day that they need to use it because the worst that could happen is that the spreads amongst Germany and Italy, Portugal and Spain that they widen, then it is a really bad situation because we are talking much higher numbers than the case of Greece. Greece to a certain extent is priced in already.

The euro might be actually going stronger towards the end of the week. That is our guess. There is a lot of shorts on the market that will turn their position at one stage and then you will end up in a short Greece that could surprise the market a bit. As to the yields, there is not much leeway to grow. Sure there is a flight to safety, but that will be limited according to the developments in the months to come. Again, Germany did take on a lot of Greek debt. So, in a way, their credit worthiness is going down along with Greece. One should not forget that at all.

Mangalam: Shifting focus back to the emerging markets, how much of an impact do you think of this could spill over to the emerging markets and any particular market which you think should or would see the maximum effects of these things?

A: When we talk emerging markets, we really need to make a distinction between Eastern Europe emerging markets, Latin America and Asia as geographic blocks. Asia has historically been quite decorrelated from what happened in Europe. Clearly one needs to look at how the consumers are going to react and how the production countries are going to be impacted by that.

But all in all, this will remain quite limited. It might be a flight away from the euro into the currencies and that could definitely benefit some emerging markets. So, one will reconsider them again, one should also not forget that the negative side that political risks are back on the agenda and they need to be rewarded to get in.