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Mkts will react negatively if Fed fails to hike rates: CS

There is a wave of risk aversion and it is sweeping across western markets. Robert Parker of Credit Suisse feels it is because a barrage of negative news have hit the markets since Wednesday — weak Chinese exports data, OPEC meet and the disappointment from ECB over QE.

Going ahead, he believes the markets will react negatively if the US Federal Reserve fails to hike interest rates.

As far as the commodities market goes, he says the base for Brent is just below USD 40 per barrel. He also adds that India is benefitting from lower commodity prices.

Below is the verbatim transcript of Robert Parker’s interview with Surabhi Upadhyay on CNBC-TV18.

Q: What is your sense? Why this sudden wave of panic pretty much across the board?

A: We have a raft of negative factors which have hit markets really since last Wednesday and Thursday. And just to list those factors which have all come together, first of all, as you mentioned we have had very weak Chinese export data that is down 17 percent year-on-year (Y-o-Y). That in turn has had a negative impact on commodity market, so those markets, for example Financial Times Stock Exchange Index (FTSE) where there is a heavy component of commodity companies has seen major declines. Linked into that we had a what can only be called a very fractious Organization of the Petroleum Exporting Countries (OPEC) meeting at the end of last week where there was no agreement on cutbacks in supply production and constantly we have seen as you mentioned a significant fall in oil prices since last Friday with West Texas into media trading at USD 37 as we talk.

And then I think in addition one has to highlight the disappointment with the announcement, last Thursday, from the European Central Bank over its quantitive easing (QE) program where there were very strong expectations that the European Central Bank would increase the monthly amount of QE 60 billion a month, Mr Draghi did not announce that and we saw a negative reaction to European market late last week and that had followed through this week. I think linked into that obviously the recovery back to around USD 1.09 also had a negative impact on European equities. I think also one has to emphasise the very high probability that the Fed does raise interest rates next week to 50 basis points. So we have got this confluence of negative factors and I wish I could find a some positive factors to give you though I am struggling to find any at the moment.

Q: You mentioned the Fed. Is it that what we are witnessing right now is the worst of the selling so the market is pretty much absolutely prepared for a rate hike? Do you think we will get a rate hike? How volatile can the reaction be? Or is the worst of it taking place right now as we speak?

A: I think the interesting question is what happens if the Fed does not raise rates next week? And I think in fact then, the market reaction would be negative because I think investors would immediately take the line of what perhaps, the Fed knows something we do not know and I think you would see a down rating in investor’s expectations about the outlook of the US economy. So I think the Fed has now got itself into a situation where frankly to maintain its credibility, it has to raise interest rates and one positive while we are talking about all these negatives, is that we did have good labour market day throughout of the US last week and that would certainly support the Fed raising rates to about 50 basis points from 25 basis points. I think the interesting question is what happens thereafter and I stick to my view that the Fed will move very slowly indeed and I very much doubt that we will get 25 basis points quarter in 2016. And if by the end of 2016, I think the Fed’s funds rate maybe up to perhaps one percent.

So I think what we will see as we go into January and February after this quite nasty year-end selling is that we will see markets start to calm down albeit at level slightly below where we are today. And I think part of the reasons for the markets to calm down in early 2016 is the expectation that the Fed will move slowly after the first rate increase next week.


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