Mkt to be under pressure in the absence of Fed action: Citi

Markets are closely watching the Federal Open Market Committee (FOMC) meet on Wednesday and John Woods, MD & Chief Investment Strategist at Citi Pvt. Bank said markets are likely to be under pressure if the Fed does not take any concrete action. He believes the global markets are pricing in German approval at this point in time and the conditionality on ECB's bond buying programme will be watched closely.

"It's the conditionalities that will be attached to the approval that we need to pay close attention to. I think the approval is pretty well priced in, but it’s whether or not these conditionalities delay the bond buying program and essentially upset Draghi's initiative to support Spanish and Italian yields," explained Woods.

Also read: How Fed may boost economy with a surprising big stick

He also expects emerging market rallies to be sharp but, short in nature. According to him, strong domestic economies will attract more capital in the future. 

Here is the edited transcript of the interview on CNBC-TV18.

Q: First up the Federal Open Market Committee (FOMC) itself. So much is being pinned in terms of something coming as early as late Wednesday itself from the FOMC. Are you expecting that we will get a concrete bond buying plan from the FOMC late Wednesday?

A: I am not confident. There seems to have been a pretty extraordinary shift in market expectations following the jobs number we had on Friday and the market now has become almost unanimously round to some fairly aggressive action by the Fed in terms of USD 400-600 billion of mortgage backed securities for example, expanding the Fed balance sheet in quite an aggressive way.

I tend to still feel that there is some sense in keeping some powder dry ahead of the fiscal cliff in January. At a personal level I think I would be pretty surprised if they threw the kitchen sink at the US economy as it were at this juncture and to that extent perhaps the market is setting itself up for somewhat of a disappointment.

Obviously anything less than that's currently priced in would be seen possibly as a reason to sell into these recent highs we have been seeing.

Q: Would you expect in that case the selloff to be sharp at all, because if the market is holding onto the hope that this is just getting postponed by perhaps three or four months to meet the fiscal cliff issue which will definitely come up then do the markets really selloff so much?

A: The markets had a good run YTD. Talking of the S&P we are at 14.5% or so. In my view, we are getting to somewhat stretched levels both in terms of a conviction in terms of valuations and frankly the turnover remains very, very poor. If we don't get what we expect from the Fed I suspect very much a downward pressure.

But obviously the recent run over the last year or so has been the expectation of further intervention and easing down the road which tends to build a floor underneath equities. I think we continue the same sort of rangebound action that we have seen over the last 18 months or so.

Q: What you will be actually pricing in terms of what can happen in Europe? Do you think there can be some serious upsets from the Constitutional Court at all? We had German policymakers, notably Klaus Regling who administers the European Financial Stability Facility (EFSF) telling us that he doesn't quite expect the German Constitutional Court to throw up any negative surprise. But there have been fresh litigants saying that the ECB bond buying definitely is contrary to what the German Constitutional Rules agree to. Do you think we would get an upset at all?

A: I think it's the conditionalities that will be attached to the approval that we need to pay close attention to. I think the approval is pretty well priced in, but it's whether or not these conditionalities delay the bond buying program and essentially upset Draghi's initiative to support Spanish and Italian yields.

I have noticed for example in the last few days or so, those yields have been ticking up again in fear of these so called conditionalities. We will have to wait and see, but certainly there still seems to me quite a philosophical difference between what Draghi is seeking to achieve and what the Bundesbank is willing to concede.

Certainly the idea that simply purchasing unlimited amounts of Spanish or Italian bonds and parking that risk or migrating that risk to the balance sheet of the ECB is seen with somewhat of a raised eyebrow in Germany.