MC:'Rising crude prices may delay policy easing in EMs'
Despite the second Greece bailout being agreed in principally, Sarah Hewin, senior economist (Europe), Standard Chartered Bank believes, uncertainties about the economic environment of the euro zone continue to prevail.
The second tranche of LTRO is expected to be in the range of 500 to 750 billion euros . "Hopes about the LTRO are are reasonably high, that there will be strong demand. But that is largely already factored into the market," she added.
She feels that if the demand is higher than the consensus, it would be indicative of substantial liquidity floating around and would support markets.
Meanwhile, crude prices have been heading higher on the back of heightened tension between Iran and the West. This could worsen the inflation picture for emerging economies including India and could delay further policy easing, Hewin warns.
Europe is already reeling under the fears of slipping into a recession and high crude prices may have a serious impact on its growth.
"For the developed world the impact is potentially serious for the growth outlook. We already expect to the Europe in recession this year. Recession could worsen as a result of high energy and commodity prices," she added.
Below is the edited transcript of Hewin's interview with CNBC-TV18. Also watch the accompanying video.
Q: How are you looking at the global asset markets? Is this a temporary lull as the markets have run hard or do you think with the LTRO coming in by the end of the month you could see another quantum leap in March?
A: From the European point of view, there are still some uncertainties despite the fact that the second Greece bailout was agreed in principle earlier this week. Over the next few days we will see the LTRO and hopes are reasonably high that there will be strong demand for that. But that's largely already factored into the market.
We have to remember that the Greek parliament have to pass very swiftly several measures by the end of this month. There is still lack of clarity on how much financing will come through from the IMF for the bailout. The parliamentary approvals from Germany and from Netherlands need to pass by the end of the month as well for the bailout to be agreed.
We need to wait and see how much private sector involvement there will be in the debt restructuring for Greece. If it doesn't happen to be a voluntary debt, then it would trigger CDF and might sour the tone of the markets.
Q: How important do you think the size of the second LTRO is? Do you think if it is lower than market expectations we could extend this bout of correction or will it still be supportive given the kind of money it will anyway infuse into the global economy?
A: The markets might end up being disappointed if the demand is less than the consensus which is around 500-750 billion Euro. Having said that, if demand is relatively low then that would indicate European banks already feel as if they have adequate access to financing through other means.
So, in a way it might be indicative of firmer sentiments amongst the banks that rather than one reason for markets to selloff. If demand is high then that would suggest that there is going to be substantial liquidity floating around and would be pretty supportive of markets.
But it is not clear to me at the moment as to how markets will response if there is an undershooting. It may surprise us. It may not come through as being quite a negative.
A lot depends on what else is happening at the same time. Next week is an incredibly busy week event wise in terms of Greece. We also have some key data releases towards the end of the week, the US, China PMIs and the non-farm payrolls on March 1 and 2.
Q: The other worry from an Indian or emerging market standpoint is the way crude has been trending. Crude is rising on its own steam for geopolitical reasons. We also see a lot of European money rushing into risk asset classes including commodities. Do you think that that will steamy some kind of a rally or improvement you are seeing in emerging markets? How big is inflation a threat for you from an emerging market's angle?
A: Well, a lot of the concerns over inflation were very prevalent last year. As the year progressed, we have seen emerging markets central banks starting to ease policy as worries have risen over the growth outlook rather than the inflation outlook. But, policymakers are very conscious of the risks that high oil prices can bring to the inflation picture.
It may well delay further policy easing or limit further policy easing in emerging economies. For the developed world, the impact is potentially serious for the growth outlook. We already expect to the Europe in recession this year. Energy prices actually in Euro term are already at place to record highs, so that's a real concern for policymakers here. Recession could worsen as a result of high energy high commodity prices.
Q: Are you all beginning to get the first doubts that an expected rate cut from the RBI in April may not happen?
A: The growth picture in India has disappointed and for that reason we would still expect to see further policy easing. Policy makers are attuned to what is going on in the global environment and commodity prices. They have to weigh up the risks that higher commodity prices trigger inflation, but also look at the risk that higher commodity prices are dampening demand and could be risky for growth outlook.
