CLSA's Chris Wood says Euro zone likely to start breaking up within 2 years

MUMBAI: The Euro zone is likely to start breaking up within two years, said Christopher Wood, Chief Equity Strategist and Managing Director at CLSA.

In his widely followed newsletter Greed and Fear, which was released on Thursday, Wood said that Italy is the prime candidate to exit the Eurozone first regardless of whether the country's Prime Minister Matteo Renzi wins or loses the referendum on constitutional reform which is due on December 4.

The spotlight will be on the Eurozone next week as opinion polls have shown that that the Italian Prime Minister is likely to lose the vote of confidence he is seeking, said Wood.

On the likely course of policies in the US after President Donald Trump takes over in January, Wood said that nobody can be sure exactly what he will be able to implement given the natural tensions within the Republican Party between economic nationalists/protectionists and supply-side free trade types.

Wood said he is assuming that Trump will go for aggressive tax cuts and spending increases which is why the sell off in US bonds has been severe.

In the report, Wood said there is a real possibility that US Treasury bond yields have bottomed that he is not going to make a definitive call for now given the political uncertainties.

"The reason to believe bond yields have bottomed is the potential inflection point represented by Trump, not only in terms of fiscal policy but also if there is really a retreat into full-scale protectionism resulting in the end of globalisation," Wood said.

Wood added that regardless of the long term view of the bond market the base case is
that the bond correction will continue for now with the 10-year Treasury having broken above the key level 2.25%.

"Indeed the yield could rise to 3% and still be within the upward channel of the 35-year-old bull market," said Wood.

On the dollar rise seen recently, Wood said he continues to find the rally in the greenback following Trump’s victory more surprising than the sell-off in bonds.

Wood said CLSA’s technical analyst Laurence Balanco’s view is that a clear move above the resistance level of 100 resistance in the Dollar Index would provide an upside target of 106-108 and eventually 114-115.

On Thursday, the index had topped the 102-mark, a level last seen in 2003.