Jun 20, 2012 10:26 AM IST | Source: CNBC-TV18

Muted expectations of QE from Fed today: Udayan

Today is a big day on the global front. Even though the US Federal Reserve meets, there are muted expectations of some kind of Quantitative Easing, says CNBC-TV18's managing editor Udayan Mukherjee.

Today is a big day on the global front. Even though the US Federal Reserve meets, there are muted expectations of some kind of Quantitative Easing (QE), says CNBC-TV18’s managing editor Udayan Mukherjee. Whether or not the Fed will go ahead and announce any stimulus measures to lift the ailing US economy is what a lot of the global attention will be fixed on today.

Locally we’ll probably know the details of the CCI’s (Competition Commission of India) order on cement companies. Watch out for that group of stocks which could be in focus but otherwise the market slipped into a trading range yesterday.

Below is an edited transcript of his interview. Watch the accompanying video for more.

Q: A reaction from markets will happen only tomorrow morning for the Fed but we have bet our tidings today in terms of how markets have performed and some of Mondays skepticism seems to have been put behind them?

A: Yes, the market slipped into a range out here and globally too markets seemed quite stable at this point in time because the second half of June was always going to be global policy focused and that’s pretty much what global markets seem to be at, at this point in time. The only observation one would make is that with the S&P at 1,360 you would have expected this to be a phase of slight higher convection but you are not seeing that in the volumes.

So it is an up move that we are still in the midst of in global markets but it seems more like a tentative kind of an up move so far because it’s not backed by the kind of volume momentum you would expect to see at the end of a 5% plus rally pretty much across global markets. It’s not that classic risk on that we are in the midst of at this point even as stock prices have tended to grind higher over the last few days.

Locally we seem to be quite range bound but at the end of the day we’ll probably find some kind of resolution in what the dollar index does from hereon. That I think will hold the key as to whether some kind of risk-on continues for the next few weeks or at least through the end of this month and into the early part of next month. Right now the dollar index is just hanging in there around 81.50. If after the policy today it collapses to below 80 then the chances of another phase of global risk-on will grow manifold.

Q: Not that much money coming in either but we are going into the Fed event just like we went into the RBI event. Everything is ginning towards a cut or an announcement of a cut or a promise of a cut later.

A: Yes, may be it will be a non-event for the market, that’s the highest probability outcome of today’s meeting. I don’t think most people are expecting a very serious dollop of QE3 and in that I would say that maybe expectations are not as much as the Indian market had before the RBI policy. I think most people are saying that maybe Operation Twist will be extended, maybe with a lower quantum than it is on currently.

For an outright new program for purchasing of assets which would be termed QE3 given that we did not have a Greek election collapse, the Fed might easily say we have bought once more time for ourselves, lets keep the powder dry and if we have to do another purchase of assets lets do it. Coinciding with some kind of bad news from Europe or when we have to deal with our problems at the end of the year with a fiscal cliff. May be September is a better time to think about QE3 rather than do it now and spend all the bullets in the gun and then have not much to do when things really come to a head in Europe.

So may be the higher probability outcome today is to give a little bit to the markets so that it does not sulk completely, extend Operation Twist a little bit, make that promise that if something ugly happens we are there to do something for the markets. A promise might be made today but an outright delivery of a QE looks like a small possibility. If it happens, sure markets will celebrate tomorrow but it’s not going in with that huge expectation that QE3 has to come otherwise markets sell-off tomorrow.

Q: In the last couple of days we have gotten pushed back into that range trading for the index.

A: Yes I think we are going to be in that range for some time now. It appears that way unless something changes on the global front. Just for the near-term, the Nifty has a small hump of around 5,130-5,150 which it has struggled a little bit to close above. So it goes above that but then retraces. So immediately in the near-term we need to cross that and it’s not very far away. You could get there today again but you need to close above that because it’s been retracing. Once that hump is crossed there is the target of 5,200. But beyond that right now you would need some kind of impetus to come in from global markets to spark of a slightly more meaningful rally.

From 5,100 where we closed yesterday 5,200 is no big deal, it’s less than 2%. That’s a day’s work for the market. If you are to talk about serious upsides in a risk-on phase to 5,400-5,600 then the global policy process will have to be far more aggressive over the next couple of weeks and then we can talk about an extension of this rally. For now, it appears that we might be consigned to some kind of range trading.

Q: What about our internals where money isn’t moving that must as we were discussing yesterday. In fact the domestics have been selling rather than the FIIs?

A: FIIs created some small shorts yesterday but nothing very meaningful. I don’t think the data from the options market is giving you any clear suggestion of where we are headed. It is safe to reiterate the same thing that the market is trapped in a 4,800-5,200 kind of trading range for now. Volatility has come off which is lending even more credence to the range bound theory because in the last couple of days we have seen the market being a bit volatile but the VIX came down.

I don’t think the market is playing for any dramatic moves in the near -term on the way up or on the way down. So you might not see very sharp falls in the event of a correction. You may get to 5,000 and then find a bottom there for now and you can go up but not very significantly above 5,200-5,250. That’s what the volatility indicators seem to be suggesting.

One thing is interesting that in the last couple of days, trading volumes have picked up quite substantially. Both, day before yesterday in the fall and yesterday in the mild recovery, we saw exceptionally high trading volumes. The level of engagement in the market may be because of the 5-6% up move that we have had in the last fortnight or it’s the expectation of global policy. The level of engagement from traders has gone up quite a bit in the last few days. So volumes are encouraging but otherwise internals are suggesting a range bound trade for now.

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