Global markets are waiting for is a confirmation that normalisation in the US is clearly on course and that the US Federal Reserve can raise interest rates to show that the economy is in good shape, says Bruno Verstraete of Lakefield Partners.
He believes that the US needs to pull global markets forward and show that the economy is in a good shape.
Below is the verbatim transcript of Bruno Verstraete’s interview with Reema Tendulkar and Mangalam Maloo on CNBC-TV18.
Reema: How is the mood now? The selling pressure instead of abating is only accelerating. What is the expectation from the Fed and if we do get a number which is not as strong, do you expect a rally?
A: What market is really waiting for is a confirmation that the normalisation in the US is clearly on a steady path and that the Fed can raise the interest rates to show that the economy is in good shape. Any number which is bad will be bad and it will proceed like that for the markets. Europe is of course a completely different game, but the US clearly needs to pull the global markets forward and show that the economy is still in good shape.
Mangalam: So, in that case, is that your base case that if the Fed were to hike rates September, then the markets would actually take that as a positive thing and go higher?
A: I think so, yes. It would clearly be a sign of strength rather than a sign of weakness. I think an interest rate increase would clearly demonstrate that.
Reema: Yesterday, we had the European Central Bank (ECB) Chief Mario Draghi downgrade his assessment of growth as well as inflation and at the same time, because of that, he indicated that they are likely to extend their monetary easing or quantitative easing (QE). Yesterday, we chose to focus on the fact that there is going to be more QE and European markets did well. But today they have come under pressure. How should we read what came out of the ECB yesterday?
A: I think of it the same way. The fact that QE is on the payroll is a sign of weakness. Clearly the European economy is not in the same shape as the US economy. There is a huge pressure on deflation given the commodity markets, given the weakness still of the European consumer and also the demand in China weakening. So, the deflation is clearly the thing to battle. That is also the mandate that the ECB has and that is what the investors will keep an eye on. So, the news that came out yesterday, as supportive it might sound that QE is on the table again, as bad as it is for the economy as a whole.
Mangalam: Perhaps that is why we are seeing a cut on the European markets today, but Bruno, what is your sense as far as the dollar and the euro currency is concerned? What are your levels on those?
A: That is very interest driven. Of course, the announcement of QE put some downward pressure on the euro and the interest rate increase in the US would clearly put some upward pressure on the dollar. So, that of course is two things that the investors are looking at and by itself would have a huge consequence on the economy and on the inflation. The fact that the exporters can grow and are supported by a low euro is clearly supportive for the economy in Europe and of course, the US is suffering from a higher dollar. So, everything seems to be intertwined but, interest rates differentials are going to be the thing to watch going forward.