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Fed likely to hike in June; EM currencies to weaken: UBS

In an interview with CNBC-TV18’s Sonia Shenoy and Anuj Singhal, UBS Investment Bank’s Ramin Nakisa shared his outlook on the expected US Federal Reserve rate hike and what it may spell from bonds, stock and currency markets, especially in emerging economies.

Below is the transcript of the interview on CNBC-TV18.

Sonia: What is your own sense about how the month of March could progress for global equity markets? The start has not been too good and now there are some fears that the Fed could hike rates sooner rather than later and that is putting a bit of pressure. Do you reckon this is only profit booking?

A: The overall pattern that we see in the market at the moment is very positive one. With the payrolls numbers being so good with that consistent numbers over 200K we are just about reaching full employment in the US according to the Fed’s own estimates. So overall I have got to say the overall piece looks very good in particularly Europe where we see cyclicals finally starting to outperform defensives.

So obviously we have seen a fairly negative reaction to the payrolls in the equity markets on Friday. So the S&P was down about 1.4 percent. The 10 year treasuries were up by about 13 bps taking to about 2.24 percent. So that interesting pattern that we see is that breakdown at the negative correlation between equity and fixed income, in other words both sold off at the same time.

So we may see that pattern reoccur when we finally see the Fed hike, which we expect to happen in June. So it is looking very much that we are going to hit that June Fed rate hike but if you look at where the Fed funds are pricing they are about half of the rate which the FOMC is telling is going to be. So we may see a snap to dots if you like in that market, in other words a shock in rates in June when we see the hike.

Anuj: That is an interesting point you made because in India also we have seen a bit of sell-off in all markets today, bonds, currencies and equity markets. Do you get a sense that if the rate hike happens earlier than expected the flows to India would be impacted or would you go by the anecdote evidence in the past when the Indian market actually had a big bull market when the US kept raising rates

A: What we are expecting it depends on the currencies in which you look at the markets so for example if you look at in dollars obviously the weakening of the rupee would be a consequence of higher rates in the US.

We are quite bearish upon EM currencies and that is very much the pattern we saw on Friday as the dollar strengthened we saw EM currencies weaken, we also saw EM equity weaken but in local currency terms obviously the story is quite different and there you could see much more upside, that is smart from an international investor’s point of view if your dollar denominated or Euro denominated then the picture is looking quite good once the Fed starts to hike.

Sonia: So, just a final two-part question then. You said you are bearish on EM currencies. How much weakness do you expect to see on the Indian rupee because over there it has gone past the Rs 62.50 level and in terms of Indian equities itself what is your own prognosis?

A: Well, we do not have a forecast actually for the Indian market. We do have one for the European market which is 800, first of this top 600 we are expecting 380 for the end of this year. So, obviously we are already above that so we are starting to get a little bit nervous about where the European market is at the moment.

In terms of what we are expecting for India, we would prefer India relative to other EM regions, we would also prefer China relative to other EM Asian countries but overall we still strongly favour DM over EM for 2015 particularly with the rate hike for the weak commodities we still think that DM provides the best value and in particular Europe with the kind of tactical risk from Greece.

So we have actually cut our overweight in Europe massively because of the risk we see from Greece in the short term.

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