MAR­KET’S VOLTE-FACE ON FED’S FU­TURE PATH IS A RISKY TRADE

Bro­ker­age sees ru­pee at 75, G-sec yields at 8% and Nifty in 10,40011,000 range

Financial Chronicle - - MONEY GAME - FC BU­REAU

Apre­sumed dovish Fed stance in the week’s tes­ti­mony and the cor­rec­tion in crude prices have been in­ter­preted as signs of a re­lapse in ex­cess global liq­uid­ity and risk-on trade. It, how­ever, is a false sig­nal, as the Fed is likely to stay put on its nor­mal­i­sa­tion path. The re­cent gains in the ru­pee and the soft­en­ing in G-sec yields could re­verse, pre­clud­ing a full mat­u­ra­tion of the risk-on trade.

Go­ing for­ward, the ru­pee could still touch 75 a dol­lar and 10-year G-sec yields may rise to 8 per cent by the end of the fi­nan­cial year. The Nifty could move in a range of 10,400-11,000 in the 12 months, says a re­port by bro­ker­age Emkay Global Fi­nan­cial Ser­vices.

The bro­ker­age said it is un­der­weight on the broader mar­kets.

Dis­miss­ing mar­ket ex­pec­ta­tions of a re­turn of easy liq­uid­ity con­di­tions, the re­port says, “the steep 29 per cent de­cline in global crude prices since early Oct’18 and the con­cerns about US growth have sud­denly shifted the con­sen­sus views back to de­fla­tion­ary risks, prompt­ing in­creased ex­pec­ta­tions for an early end to the Fed’s rate nor­mal­i­sa­tion process. This is recre­at­ing a belief that the re­lapse of a weak dol­lar and easy liq­uid­ity will pro­pel port­fo­lio flows to emerg­ing mar­kets, in­clud­ing In­dia.” But there is con­sid­er­able risks to trade based on such as­sump­tions, says the re­port.

It says con­sen­sus ex­pec­ta­tions now price in only two or three more rate hikes un­til 2019-end. How­ever, this con­trasts with the Fed’s guid­ance of four more hikes to 3.25 per cent by 2019-end. “Our es­ti­mate for a fair value of the Fed rate is closer to 4 per cent, and we ex­pect it to breach 3 per cent in the next 12 months.”

US so­lid­ity, it says, is in con­trast with the mar­ket’s volte-face. “The con­comi­tant oc­cur­rence of pos­i­tive out­put gap (real GDP growth of 3.0-3.4 per cent com­pared with a po­ten­tial 2 per cent), nega­tive un­em­ploy­ment gap (un­em­ploy­ment rate of 3.7 per cent is less than the non-in­fla­tion­ary level of 4.6 per cent) and the de­cline in ini­tial job­less claims to 40-50-year lows sug­gest a strong and sus­tain­able growth trac­tion,” says the re­port.

Fur­ther un­der­lin­ing the strong US growth view, the re­port says small busi­ness sur­veys ex­ude con­fi­dence not seen since mid-1980s. They demon­strate a strong in­tent to hire, pay more wages, and an in­crease prod­uct prices. Se­nior banker sur­veys also sug­gest that there is an in­creas­ing will­ing­ness to lend to firms and house­holds. In such a sce­nario, the Fed is likely to ig­nore mar­ket volatil­ity and stay on its rate sched­ule.

The re­port says the re­cent soft­en­ing in In­dia 10-

Port­fo­lio flows into EMs have been con­tract­ing with Fed nor­mal­i­sa­tion ($ bn)

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