The European markets will be reacting to a whole host of economic data coming out this week, says Nick Parsons of National Australia Bank. The upcoming CPI data will most likely indicate to the ECB that it must persist with its quantitative easing (QE) programme.
At the moment, European bond yields have calmed, he says. But volatility is not far away either. Parsons believes any unexpected data can trigger volatility.
Moving to the US, he says most analysts see the Federal Reserve raising rates in September. But if market pricing is anything to go by, he sees the first rate hike happening in January or February.
Below is the verbatim transcript of Nick Parsons's interview with CNBC-TV18's Reema Tendulkar and Sumaira Abidi.
Reema: In Friday's trade which started off strong there was this positive comments from Draghi about continuing with quantitative easing (QE) which resulted in the European markets opening up smartly. But they gave up ground after we got this disappointing economic data of US. What is the outlook for European markets today and near term?
A: You correctly described the opening as a mixed and that is a word you will be hearing quite a lot this week. If you look at the European data calendar specifically on Tuesday we are going to get that ZEW survey of analysts’ expectations. On Friday we are going to get much more importantly the German IFO survey and in between those two events we are going to get the flash Purchasing Managers’ Index (PMI) readings for France and Germany and for the Eurozone in aggregate. So we are going to get plenty of fresh economic data. We will also get a read on the final Consumer Price Index (CPI) which should come in pretty close to zero. But even at close to zero it will remind us why the European Central Bank (ECB) is going to and has to persist with its QE program up until September 2016 but all of this is kind of one of those knowns if we could put it that way and given that we have also got an EU leaders meeting in Latvia starting on Thursday to discuss Greece that is going to overshadow the economic data. So probably you will find that you are using that word mixed European market quite a lot this week.
Sumaira: Amongst the known knowns then is it also now known or expected that perhaps the Fed hike could come sooner, could it be delayed, what is the expectation given the recent weakness in data?
A: The general expectation amongst analysts is that they will not be starting until at least September. The market pricing and if you look at either the Fed funds futures or the OIS strip whichever of the metrics you take they are indicating something more like January or February 2016 and it is part of an ongoing process that the expectations for the timing of the first Fed hike pushed further and further out into the future. So the consensus amongst analysts is that it won’t be until September but if you derive it from market pricing it is looking something like January or February.
Reema: Have the European bond markets come down? Last week we saw the German Bund yields rise to 0.72, it is now 2.62 or 2.63 but what is the view now on the bond market?
A: Have they come down, the answer to that will be yes. Will they continue to be calm is obviously a tougher one to answer. As long now as we are going to get inflation numbers come in either side of zero, the bond market in Europe is going to say look there is this QE program in place, we don’t have inflationary pressures, we have got an economic recovery which is beginning to gain some traction but we should be calm for the next three to six months however it is not going to take much in the way of strong data surprise to once again spark further volatility in bond markets in Europe and it may even be paradoxically and somewhat perversely it could be that a resolution to a Greek dispute could be the trigger for a selloff in co-European bonds as the investors ask themselves why are we holding this allegedly safe haven assets. So, a plenty of triggers still for further volatility even if at the moment we have got a calmer backdrop to market.
Sumaira: You said in Europe the word mixed could be heard very often. Well back home it is volatile, there is no such thing as mixed in India these days, everything is volatile. So what is the outlook now on India. We have seen such ups and downs in the last few weeks odd. What are the global investors now looking to do?
A: Indian markets sometimes remind me of a gold fish and what I mean by that is that if a gold fish stops then it dies. If a gold fish stops moving it dies and sometimes you get that in markets they must at all times either be going up or be going down. They can’t go sideways and they can’t be mixed sometimes and If you ask me what is the near term outlook the good news is that we appear to have found some stability in the currency because for me currency drives everything in EM and we came from the beginning of April 62.10 to 62.20 on the rupee all the way up to the high of 64.28 earlier last week. The fact that we are now down on a 63 big figure is helpful and that will produce a little bit more calmness. I am not suggesting that the market is going to run away with the idea that the problems are all behind us over recent months but the fact that at least we have seen some stability returning to the currency does offer some hope that we might also see that across asset markets too. The fact that the rupee is down strengthened by more than a big figure is tentatively one of those positive things to look at.
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