Nick Parsons of National Australia Bank believes the Federal Reserve will begin with a very modest tapering of around USD 5-10 billion per month and its continuance will be data dependent. "There will still be some flexibility (in tapering) going forward and the markets could quite easily cope up with that, in fact, they would welcome such a move," he says in an interview to CNBC-TV18.
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Parsons believes there will not be any nasty surprises from the Federal Open Market Committee (FOMC) meet on September 18 and post that, emerging markets will see a bit more gain but until then, markets will be in a holding pattern.
Below is the verbatim transcript of Nick Parsons’s interview on CNBC-TV18
Q: There is expectation of a taper lite programme on the FOMC meet which happens next week, what are investors talking about, what is the approximate amount that we could hear of?
A: The Federal Reserve buys USD 85 billion per month of treasury and agency securities. They want to get down to zero by summer next year. That would be equal to a reduction of around USD 10 billion per month.
All markets are beginning to think that it will not be a linear process, not to disrupt investor’s expectations, it might start just at USD 5 billion per month and certainly no more than USD 10 billion. So, it will be a very modest reduction to begin with and its continuance will be data dependent.
There will still be some flexibility going forward and the markets could quite easily cope up with that, in fact, they would welcome such a move.
Q: How is India placed in this entire scheme of things?
A: India will be looked at in the context of emerging markets (EMs) more broadly. The focus is not much on India specifically but how the EM will react to this. We have certainly seen a positive reappraisal over the course of last two weeks.
If you look at the MSCI EM index from early May just before Bernanke first proposed the idea of tapering to the end of June, the market fell a little over 15 percent. Now, subsequently, it has retraced exactly 50 percent of its losses. A 50 percent re-tracement is an important signal and often gives a period of some consolidation.
The technical re-tracements that we look for, globally across all asset markets they are 38 percent, 50 percent and then 62 percent. Often when we get 50 percent re-tracement when the market regains or gives back half its gains or losses previously, we then have a period of consolidation and that matches quite well with the timetable.
Next Tuesday-Wednesday is the two-day FOMC meet, we will have to wait to see if there are any nasty surprises from the Fed. The data continues to suggest that it will not be an aggressive process thereafter we could see EM making a bit more gains but it would suggest that for the next few days, we are in a holding pattern.