Manish Singh, head of Investment Services at Crossbridge Capital, gives his view on how markets could react depending on the US presidential election outcome.
A ‘New’ and ‘Improved’ Can
If there were a ‘phrase of the year award’ it would most certainly go to – “kicking the can down the road.” It is not a reference to a game of kicking the can but a reference to Europe’s procrastination in coming up with a solution for the continent’s sovereign debt crisis. Bearish investors clearly underestimated the length of the road and Draghi’s PUT (the ECB plan to buy peripheral countries’ bonds) made the road even longer and wider. This ‘New’ and ‘Improved’ can has kept the risk of a break-up at bay and seen the stresses in Europe ease.
The importance of the ECB’s OMT (outright monetary transaction) should not be under-estimated. It has the ability to ease financial market stress significantly (as it already has even before it is implemented), to boost economic growth (we have yet to see this), and to lead to institution building (a work in progress) in the Euro area for the Union’s survival.
November marks the one year anniversary of Mr Draghi ascension to the helm of the ECB. His stay at the ECB has engendered an S&P 500 rally of over +20% and two +20% plus rallies in the Eurostoxx 50. So what is next?
The novelty has certainly worn off, but Draghi’s promise “to do ‘whatever it takes” lives large, keeping short sellers of both the EUR and peripheral sovereign bonds at bay. However, for the European economy, the improvement in financial market conditions is still failing to lift the real economy. The euro area composite PMI (an indicator of economic activity) still languishes in the contraction zone of sub 50 (45.8 the current reading). Germany’s growth is flat, France’s growth worrying and the periphery still in recession. In its latest quarterly Bank Lending Survey published Wednesday, the ECB said 11% of banks that took part in the survey made it harder for companies to borrow in the second quarter, while only 1% eased their rules. The net balance of 10% was up from the 9% in the first quarter. Expect the ECB to deploy more unorthodox monetary policy and cut rates further, if credit availability tightens further.
In an encouraging sign, the Bundesbank Target 2 balances (money that other eurozone central banks owe the Bundesbank) have started to decline, from €751bn in August to €695bn in September i.e. bank deposits in the periphery have started to increase and this should improve liquidity and lending to peripheral economies. The ECB’s OMT program should reduce concerns surrounding the liquidity needs of sovereigns and 2013 should bring a modest recovery in Europe.
On the policy front, there has been a notable change within Germany’s policymakers with a renewed willingness to support Greece. IMF head Christine Lagarde is travelling around Europe trying to broker a deal to re-structure Greek debt. Greece is likely to get both more time and more money. Recent polls in Europe (Holland and Finland) indicate the radical nationalist objections to Europe are beginning to recede, at least for now.