Markets globally will fall in sync on Fed tapering: UBS

Irrespective of whether the news of the Federal Reserve tapering its USD 85 billion dollar quantitative easing is priced in or not, global markets will all fall in sync, says Ramin Nakisa of UBS Bank.

Also read: Fed should continue QE tapering for 17 months: Wilbur Ross
Speaking to CNBC-TV18, Nakisa says all markets across territories saw deep corrections after the Fed policy on June 19 even though the announcement had been benign. 
"I have never seen a situation in which equities, government bonds and credit markets all fell simultaneously. So that is exactly what we saw. Its hyper correlation in the markets," adds Nakisa who expects a similar situation post Bernanke’s speech tomorrow. Below is the edited transcript of Nakisa’s interview to CNBC-TV18. Q: Assuming that the Federal Open Market Committee (FOMC) says what everyone expects it to say that they taper USD 10 billion a month starting October. How do you think markets will react? Will it be comatose because it is all factored in?
A: That is actually unlikely. People say that it is priced in but I wouldn’t underestimate the shock of Federal Reserve (Fed) tapering because there were no new statements on June 19 when the Fed announced that it might taper and yet, the markets reacted in a very extreme way the following day.
I have never seen a situation in which all of the equities, government bonds, credit markets fell simultaneously. So that is exactly what we saw. Its hyper correlation in the markets.
We are going to see more of that hyper correlation following this announcement. I think we will see markets fall in sync again. But I think the best place to be in is equities because we still see a global recovery. We want to be exposed to the other side and looking through tapering over the next six months or a year, I think the EM is the best place to be initially. Q: Your expectation that all asset classes could again turn volatile and negative after the FOMC statement is a little disturbing for those who will be long emerging market currencies and equities and there will be quite a few at this point because the last two weeks have seen a roaring comeback on both these asset classes. So, is the sell-off big in emerging market currencies and equities?
A: I expect volatility, that is for certain. So, go long volatility going into tapering. If you want to make a directional bet, then I would look beyond fairly short term bets. I would look to something like 6 months out, one year out, look to kind of longer term view of the recovery.
I think there will be another sell-off in emerging markets. But I would stress that last time around it was very short-lived. It was literally like a two day phenomenon. Q: What would be assumed to be a shock from the FOMC?
A: One of the things that people are concerned about is the next Fed president. In the initial announcement, if we see a larger-than-expected rate of tapering, then that obviously that will be a big shock to markets.
People have assumed that it is going to be USD 10 billion, but if we see significantly higher then obviously that would be a shock.
However, I think the Fed will be very careful about this first step. I think they will want to copy what the market expects them to do. So, we won't have a shock for the first step of tapering. I think they will be very carefully watching the markets, particularly the US housing market which is the key for recovery. They will be watching that very carefully as they taper. I think they will watch the reaction very carefully and then guide accordingly.