The sentiment in global market continues to remain fragile after Federal Reserve’s decision to taper quantitative easing by year end led to a bloodbath on the Wall Street.
Foreign investors are selling heavily from Exchange Traded Funds (ETFs) especially emerging market ETFs, says Mohammed Apabhai, Asia Pacific Trading Strategies Group of Citi.
According to him, the market is still trying to come to terms with Ben Bernanke’s statements and the credit and foreign exchange market are worse off than equities. Market participants sitting on huge losses due to this global carnage will use any bounce back in the market as a selling opportunity, he cautions.
Apabhai has a fairly negative outlook on India. The Indian currency, which hit a life time low of 59.93/USD recently is likely to remain under pressure in the near-term. With this weakness in rupee, the possibility of a rate cut by the Reserve Bank of India (RBI) has reduced, he added.
Below is the edited transcript of Mohammed Apabhai’s interview with CNBC-TV18
Q: What you are hearing anecdotally about the outflow situation especially from some of the emerging market (EM) Exchange Traded Funds (ETFs) and whether you think that is likely to exacerbate from here on?
A: We are seeing market stabilising at lower levels this morning. Although sentiment continues to remain fairly fragile we are seeing some fairly heavy selling continuing out of the ETF especially global emerging market ETF and Emerging Index Fund (EEM). So the selling is definitely coming from foreign investors across the region.
Today some central banks are starting to take some action - the People's Bank of China (PBOC) is injecting liquidity reportedly into the Chinese financial system, Korean regulators are also talking about taking some market stabilising measures. We have got the Bank of Japan governor also speaking today afternoon.
Upto the weekend some markets may find a little bit of a support, but sentiment is still very fragile. The market is still absorbing comments from Ben Bernanke as well as the rise in the bond yields which is unsettling everything. The credit and foreign exchange market continues to remain very jittery even more than equity markets.
Q: Do you think any pullback or stabilisation could just be a short covering move which is temporary in nature or do you think most of the pain is behind us in EM equities?
A: I still continue to believe that we are in the process of a short covering rally. The bounces that we are seeing across the region are not even taking us into positive territory. So in Hong Kong we are off the lows, we are still down 1 percent and that is the picture across the region.
Markets like Indonesia still down 2.5 percent, big foreign positions that are owned there and until you see a stabilisation in the currency, bond and credit market it does feel like there is going to remain continued outflows.
From our clients perspective we are seeing that clients have reduced their long positions by just over half from the start of the year. So there are still a large number of people who are in the market who have started to sit on losses and may be using any bounces as a selling opportunity.
Q: What is causing this continued rout on currencies you think and is that likely to unravel some more or are people expecting to see a bounce in some of these EM currencies sooner than equities?
A: The reason why this is all happening is coming from three places in particular. The statements coming from the Fed obviously is causing rally in US treasury bonds and that is causing the dollar to go a bit. One of the big consensus trade there has been out there has been this carry trade, the purchase of bond like equities for example and as bond yields have rallied from somewhere around 1.62 over 2.40 in the 10 year yield in the US.
That is causing bond market outflows in lots of Asian and EMs as well. Yesterday we saw markets like Indonesia and Singapore, where the bond yields rallied by 50bps and 25 bps respectively. Those outflows are really impacting the currency markets. When we try to read that into equities what is happening is that people, who look at some of these markets for a dividend yield, are finding that the movement in currency and movement in equity is wiping out any positive carry that they are getting from the dividend. Then you are seeing the volatility rising on some of these names that shouldn’t really be that volatile.
So far we are seeing continued outflow from the credit markets. The Chinese action in a way is causing a shortage in the funding markets also not helping and the Bank of Japan is not actually adding any more liquidity over and above what they have already promised the market. The key really for stabilisation is likely to be, one, what happens with the US 10 year bond yield, whether they stay here and two, the outlook for markets that are very well owned and whether people do continue unwinding overall positions on an ongoing basis.
Q: Where does all this leave India, for the Nifty do you think 5500 support will hold out and for the rupee the 62 to the dollar mark?
A: In India as in the rest of the region we are at very important levels right now which are near the levels where people have got in either for this quarter or for this year. If there is no stabilisation in other markets then unfortunately the outlook for India is still going to be fairly negative.
Remember that the weakness in INR caused by the bond outflows and equity outflows potentially has the impact of reducing the room available for rate cuts by the RBI.
The overall sentiment is very much one of selling things that people own. India remains one of the markets where clients remain fairly long in terms of positioning so far for this year. In a way the outflows that we have seen for India are relatively small compared to the size of the market, compared to what we have seen from the ASEAN (Association of Southeast Asian Nations) markets. But certainly the Indian rupee looks like it is going to remain under pressure for the time being.