Nick Parsons, Head of Research, UK & Europe of National Australia Bank in an interview to CNBC-TV18 shared his views on outlook for global markets and crude prices.
According to him crude prices are likely to stable around the current levels of USD 62 per barrel for the next few months.
On the global front he thinks there are growing worries about corporate earnings amongst major indices and concerns on the outlook for yen than the decline of crude prices, which has already played out.
Also read: India to reap $ 12 bn-plus budget windfall from oil slide
Below is the transcript of Nick Parsons’ interview with CNBC-TV18’s Reema Tendulkar and Ekta Batra.
Reema: What is the prognosis for European market like the CAC, DAX and FTSE for the next few months, are we headed lower?
A: It would appear that we are headed lower in the very near-term. There are some serious concerns growing around. It could be outlook for corporate earnings and not just oil story – oil story to a large extent has already been played out but there are growing worries about corporate earnings amongst the major indices and also there are growing concerns around the outlook for Yen.
So, those are all coming together and after a year in which we have seen some surprisingly good profits and some very good index performance we are now seeing investors just taking a very much more cautious stance globally.
Ekta: Can you just tell us what levels people are talking about when it comes to Brent crude and what would be a sustainable average according to you?
A: As far as the oil price is concerned let us bear in mind we have come down from USD 116/barrel to USD 62/barrel. So we are almost 45 percent down from the highs. I have seen lots of reports which suggest that indeed marginal cost for much of US production could be as low as USD 40/barrel but it is generally one of these stories that once you start to see some fairly outlandish claims being made to the downside it tells you that the largest parts of the move is already behind us.
So, I would have thought somewhere at or around close the current levels is more likely where we are going to settle over the course of the next few months.
Reema: ATHEX was down 20 percent last week. Do you expect the political situation in ATHEX to blow up and turn out to be a big risk for the markets?
A: Greece is a significant risk for markets. They have to decide by December 29th whether they are going to be able to form a new government or whether there will general elections which the opposition party may well win and could decide to exit the Euro. At the moment it is a much less than 50 percent probability but the outcome is potentially fatal both for Greece and for the Eurozone in its current form.
So it is one of those things where markets are trying to price-in a low delta probability with a significant preferential outcome and those are almost the most difficult thing to do. So it is no surprise that Greek stocks are bearing the brunt of the market sell off.
Ekta: We wanted a sense in terms of how the Federal Open Market Committee (FOMC) is going to treat the steep decline that we have seen in oil prices because though it is going to affect some amount of corporate profits it is possibly going to boost retail sentiment and that is the expectation in the US. How do you think the US FOMC is going to factor that in this week?
A: It is a very important question and you are right to ask it. The thing to bear in mind is that roughly speaking every cent of the gasoline price puts around USD 1 billion in the pockets of US consumers. So it is equivalent to a tax cut for consumers, which will stimulate demand and could add potentially as much as half to three quarters of a percent to US economic growth sustained over the next year.
So it is undoubtedly good news for consumption and for the real economy, it is going to help job creation and support the economy more generally. What it does mean also though is that the Fed will be undershooting its inflation forecast but to the extent that the Fed has got a twin mandate that is full employment and low inflation.
It is more likely to push out the time of the first Fed rate hike rather than bring it forward. So the Fed looks to maintain this balance but the likelihood is that it will be pushing the rate hike forecast out, is sustained.