The markets hope for stronger economic recovery amidst continued quantitative easing (QE) is schizophrenic, says Geoff Lewis of JPMorgan AMC. "Stronger non-farm payroll data from the US will indicate that the economy is continuing to recover and cause the Fed to start tapering QE. Though this might cause problems for the fixed income market, I believe it is positive for equities," he told CNBC-TV18.
Geoff Lewis adds that there is no room for optimism on industrial commodities until there are signs of a stronger growth momentum developing in China.
Below is the edited transcript of the interview on CNBC-TV18
Q: What is your view of the global markets' state of mind before the nonfarm payroll data are released?
A: We expect the data to be somewhat better than last month. I think the nonfarm payroll data is certainly one of the key indicators that everybody is looking forward to now. If the nonfarm payroll data comes in at 180,000-200,000 then that would be excellent news. It would suggest continued US economic recovery even as the worst effects of the sequestration and the fiscal drag start to fade.
These are certainly key numbers to look at. The markets have been correcting and there has been some profit-taking. Though it does not really feel like a major inflection point at the moment, but the markets have been very choppy for the last few weeks.
Q: If nonfarm payroll data does come in at 180,000-200,000, would there be a risk-off in the market in anticipation that the Fed will see that as a hint to trim quantitative easing (QE). What level of the nonfarm payroll data might trigger more risk-off in the markets?
A: The markets are in two states of mind. On the one hand, they do want to see economic recovery, on the other hand, they want the Fed to keep the monetary policy very, very accommodative and do not want to see an end to QE. So, the narkets are a bit schizophrenic. The markets want to have their cake and eat it too. That range of 180,000-200,000 for nonfarm payrolls would be a strong figure.
Our forecast is that it would be somewhat less than that actually. That kind of level could actually be a little bit too strong for the markets. On the other hand, at some point the Fed will begin to taper off these extraordinarily loose, unconventional monetary policies because the US economy is gaining ground. That might cause problems for the fixed income market, but we believe it is positive for the equity market.
Q: The dollar staged a pullback or depreciated against a majority of the currencies in the past few days. Where do you think the dollar index is heading especially against the yen and the euro?
A: This is a general trend towards a stronger dollar and that has been supported by the fact that the US is several years ahead of the euro zone in terms of its deleveraging and its economy is fundamentally healthier. So I do not think that trend is going to change.
As for the yen-dollar, the Bank of Japan's (BoJ) promised expansion over the next two years and the incredible monetary easing that will ensue, at some point, must start to drive the yen down further. The euro has started to benefit from the fact that the euro zone, overall, has a strong current-account surplus which is keeping the currency rather firm.
Q: What is your view on expectations that this play of risk-off will continue in the emerging markets? Will there be an increased preference for developed markets and will more funds flow out of emerging markets? Where does India stand?
A: Year-to-date, I think funds will continue to flow into emerging markets. But in the near-term, it is hard to pinpoint a strong catalyst. Growth has been pretty disappointing. The PMI for the emerging markets as a group has been relatively weak recently. The source of this weakness is the euro zone recession. External demand continues to remain weak and is probably at its worst now.
Emerging markets should be doing better as the year progresses and we are still optimistic that the emerging markets will have a better second half. But it is hard to see any near-term catalyst, particularly with Japan so much in the limelight now. There is still a lot of money to go into Japan to take advantage of this temporary fall back in the Topix (Tokyo Stock Price Index).
Q: Do you expect a formidable rebound in commodity prices?
A: I think you really have to separate the commodities. You have to look at gold which has asset qualities and which is seen as an inflation hedge against the longer term problems from QE. And you have to look at oil in different light. I do not see any room for optimism on industrial commodities until there are signs of stronger growth-momentum developing in China. Gold has started to stabilise and is better supported. Oil is in a relatively tight trading range and it is likely to remain there.