US markets ended down on Thursday as investors booked profits amid weak economic data and comments that the US Fed may soon start winding down its monthly buyback program. However, Arnab Das of Roubini Global Economics believes that process of bond buying by the Fed will continue.
There are some signs that the US economy is recovering and some signs that the recovery is weak. Thus, in his view the debate will continue because of the mixed signals.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: Despite having disappointing economic data whether it is from the European zone with GDP which came out two days back or yesterday’s US markets, you are not seeing a significant correction or market seem to be shrugging off irrespective of what the data point is. What’s the call now on global markets in general?
A: First of all what’s going on is that weak data points to more stimulus or continuation of monetary stimulus from the Federal Reserve, Bank of England, Bank of Japan and ultimately as well the ECB. So, if there were much stronger data showing that all monetary stimulus was gaining traction, stimulus would come to an end sooner and maybe the valuations would correct.
The gap between markets and economic fundamentals would narrow. I guess we are in the kind of paradoxical situation where weak data plus higher asset prices through the mechanism of more money.
Q: The US, Japan and Europe have retraced a bit from its five-year highs. Are you sensing that maybe there is a bit of fatigue and now investors maybe looking at emerging markets like India, which has been doing quite well for the last two weeks?
A: There has been a bit of a rotation from emerging markets. Expectations have gotten too strong into developed markets and particularly United States, which was gaining more traction. There is a kind of fatigue setting in a kind of realisation setting in that monetary policy can fix all our ills.
Fiscal contraction, which continues in Europe, continues in United Kingdom and is really gathering pace even in United States.
The only place where there won’t be fiscal contraction in the short-term maybe with the significant stimulus is Japan. That’s going to pose another challenge on top of the private sector balance sheet issues.
That process is going to slowdown growth or constrains the recovery in the US. It is also going to affect growth in emerging markets. So, I wouldn’t be overly optimistic that the rotation will reverse itself. It will have a big flow sustained to emerging market equities and there will be a bit a re-rating upward, but not very much.
Q: How is the market reading the voices, which we are hearing calling for Fed to taper or reduce its bond buying programme?
A: I think that debate will continue because there are mixed signals. There are some signs that the economy is recovering and there are some signs that the recovery is weak. So, the debate and the noise will continue. However, our view of it is that there will be a continue process of bond buying by the Fed.
There will be a lot of steps involved. US will be the first country to get out of the extraordinary monetary accommodation. It has done the most homework, went down in the crisis first among the four of the other countries in the high-income world.
So, the US will be the first. With this course it is quite interesting the difference between this noise in the US and continued talk of more easing in United Kingdom, euro zone and particularly in Japan. So, there is a divergence. We are not quite there yet, but it lies ahead, several months or even a year more.