No major Fed action seen; bears may sell on let down: Citi

Mohammed Apabhai, Asia Pacific Trading Strategies Group, Citi believes that the positive newsflow from Greece is largely priced in at the moment.

Political parties supporting Greece's international bailout will begin forging a government on Monday after an election victory over radical leftists staved off the prospect of the debt-laden country leaving the euro and brought relief to global markets. However, Apabhai says, concerns on Spain and Italy continue to be an overhang. The result came as a relief for Greece's EU and IMF lenders and euro zone partners who feared a SYRIZA victory would tip Greece over the edge and the common currency towards break-up. Last week, the British government announced aggressive emergency plans to flood the economy with over USD 160 billion of cheap loans, while Switzerland said it would take action to prevent a precipitous rise in the Swiss franc. This week, investors will look to Ben Bernanke and the Fed to see whether the central bank has similar plans. However, Apabhai is not expecting any significant policy action from the Fed. In fact, he believes bearish investors may start selling on the Fed disappointment. He is advising investors to switch to cyclicals with adequate hedge. “I think the upside is limited in the short-term,” he told CNBC-TV18 in an interview. Below is the edited transcript of Apabhai's interview with CNBC-TV18. Also watch the accompanying video. Q: Does it look like the Greek news will unleash a major risk on rally or is it in the price and we should only expect modest rallies? A: A lot of it is actually in the price already, the markets have been rallying into the end of last week. The Greek banks have rallied 20% at the end of last week, so a lot of this news is already into the rally. The Greek election is a bit of a relief, but we still don’t have a government in Greece and this is going to be more negotiation. We still have other problems like Spanish bond yields or 10 year bond yields are very close to 5-7%, Italian bond yields are close to around 6%. But what is clear is that the central banks after having contracted their balance sheet in May are starting to pump liquidity back into the markets again. This rally is going to be faded, but it does remove the tail risk that we were very concerned about previous week. Q: Tactically then how much more would you give markets in terms of an upside because the expectation now is with events in Greece, the ECB may be more proactive in terms of providing liquidity and come Wednesday of course we are all going to be talking about the Fed. A: Yes. The upside in the immediate short-term is probably very limited. I would expect those who are bearish to start selling again. What we are seeing is just a very kneejerk reaction to this. We are not really expecting any significant policy action from US, may be you get an extension of twist, but not really any significant probability of QE3. So, could disappoint the market. Not getting particularly excited right now, I think the core scenario for the markets is that it will just range trade for probably a lot of summer. Perhaps there will be a slight upward bias but doesn’t seem to be a particularly exciting prospect in the short term. Q: What about the downside, you said that a crisis might have been averted. For now does it look like that we may not have big downsides opening up which takes us below the lows that we formed a few weeks back or you can't be sure about that? A: You can never really tell. What you need to see is what goes on in the funding markets. What has been happening in the funding market in the last couple of weeks is that funding is coming down and that’s allowing the rally in the market. If you breakdown below the previous lows, what you would see is a complete shift in the way the markets are operating and you would see a liquidation of positions as opposed to a derisking. What is going to happen is that a lot more people are going to use to the sideline especially over the northern summer holidays. We are just waiting on the sidelines to see if there are any new problems that emerge in the short term. What people should consider doing is rotating from defensives back into cyclical. That’s a trade we have been pushing for a few weeks now, but at the same time they should hedge the downsides tail risk. So, either the market is going to rally in which case people will move back into cyclical or it doesn’t in which case you will see a liquidation of defensive names. If you breakdown below those levels that we achieved earlier this month then we do actually see much more significant downside. So it is not a very clear picture that has emerged so far. Q: Are you also playing a switch between markets because the early part of this month saw the suggestion that perhaps it was emerging markets that could pop harder in the second half. Are you playing that in markets like India? A: Yes we certainly do believe that, if we get a decrease in funding stress then the markets that do behave are the emerging markets. If you get a fall in the dollar you will get markets like Hang Seng Index outperforming. In India obviously it depends on what the RBI does today with the rate cuts, but we are pushing for people to take up short term upside exposure on the hedge side and being short on the S&P ahead of the July 1st independence holiday where Chinese leaders are going to be coming over here probably bringing some gifts. So selective long positions, but maintain directionally a very neutral approach for the time being.