Global markets factoring in Fed's dovish stance

The Indian equity market is likely to react to the important Fed meeting that will start today but chairman, Ben Bernanke is likely to speak only late Wednesday night. Hence, the market will probably respond only on Thursday morning to it believes Udayan Mukherjee, managing editor, CNBC-TV18.

The Reserve Bank of India (RBI) monetary policy that was announced on Monday did not make too much of a difference to the market. "The pullback continued yesterday, so we seem to be in a nice short-term groove for now but global markets will hold sway over which way we move over the next couple of sessions," adds Udayan.

Udayan says the Fed meeting is going to be important for all emerging market currencies and equities. He says most international markets have already started pricing in the expectation of a dovish statement from Bernanke.  Below is the edited transcript of Mukherjee's analysis of the market. On global markets There is a sense of optimism in some parts of global equity screen. Stock markets have done quite well over the last couple of days in the US, though it is just a bit worried about the way the bond yield hardened yesterday. That is not a great sign but that could just be the bond market’s way of putting a little bit of last minute pressure on the Fed Chief. However, it had cooled down to 2.13 and went back up to almost 2.20 yesterday. So, that was a little nerve-wracking. Everybody is now pretty much resigned to the fact or aligned to the fact that the Fed will soothe the market’s nerves. There is an expectation of something quite dovish and therefore, that is what the markets have priced in and prepared for over the last couple of days. That is going to be very important for all emerging market currencies, even equities. Markets have rallied ahead of the event and to that extent it is sort of going in with some expectations from Ben Bernanke. Hopefully, there will be no disappointment but a part of whatever good news has to come in is probably slowly getting built into the price even before the Bernanke’s speech tomorrow night. On Nifty Nifty’s pullback was on expected lines as we had a big fall and it was quite conceivable and likely that the markets ahead of the Fed meeting will pullback somewhat and that has exactly what has happened. What is a little baffling is that foreign institutional investors (FIIs) are still not on the buy side and not even in a rush apparently to cover up some of the short positions, which were built over the last one week or so. I think that is a strange phenomenon because if FIIs were feeling very jittery about the fact or the bears were feeling jittery about the fact that the Fed will speak in very dovish tones and talk about quantitative easing (QE) extension, then they should have covered up their shorts by now. Maybe they will do over the next couple of days but we haven’t seen too much by way of short covering yet. Infact yesterday, there was selling on the Nifty futures from the FIIs which is at variance with what the stock market has done and the kind of expectations that one is seeing built up around us. I do not know, which the right way to read it is. In the next two days before the Fed speech, there will be some short covering, which takes higher in the near-term or the FIIs are confident that there will not be a meaningful rally post the event. The market are already priced in whatever little had to happen and maybe post the event one will see it come off once again. _PAGEBREAK_ So, it is a judgement call but for now, we haven’t seen much of the short covering which I thought would have come in before the event. That needs to be monitored. But in the near-term, it looks like the pullback is still on and it may just have a bit more by way of legs in the next 48 hours.

Well Friday was quite powerful. Yesterday we dipped after the policy but then managed to come back and that should have told that the market still remains in the pullback mode. Now, how much of this dovish Fed language that market was talking about which is expected tomorrow night is already getting priced in in the move of the last couple of days is really the material point. Also, would any technical adjustments need to be made before and after the Fed statement that also is quite important. Playing pullbacks or calling the exact extent of them is not an easy sign. This market could move back another 100 points quite easily particularly if the Fed statement is dovish as people expect. Would the rally or the global pullback which has also triggered our pullback continue post the event through Thursday-Friday or will it make one last dash and then the markets will start petering out? That is not very clear but for now the Nifty can certainly get to 5950 if the language is very dovish. We still probably have Rs 3000-4000 crore of short positions from the Foreign Institutional Investors (FIIs) in the system which can get covered up and then the market could even get to those 6000 kind of levels. Beyond that the macros, the earnings, the fundamentals, will start to work against the market. So, in this journey to get beyond 6000 would need an extraordinary dovish Fed statement and the assurance for the market that liquidity will get unleashed once again, and we will start getting those Rs 1000 crore FII flows every day. If that happens, the markets can certainly go back to the top of their trading range but in a pullback, one should not get ahead of himself. One should take one step at a time and the next step probably ends around the 5950-6000 zone. Anything beyond that fundamentally is probably not deserved but liquidity and technicals can change it. However, we need to hear that in the next couple of days and not speculate and assume that those things will fall into place. On RBI’s monetary policy and trade policy Some parts of the trade deficit data were expected and the market chose to look forward, because everybody has been talking about the June data and how that will be much more benign. So, I guess the market is more focused on that. Not to labour on the USD 20 billion trade deficit number which was very high, but the fact that exports had a very disappointing performance in the month which went by is really quite disappointing. We have just been focused on the import aspect and the hope was that we are getting into a good export trajectory but last month was a break on that and therefore the market should take note of that as well. On the monetary policy, it was more of the same. The RBI will probably speak in semi- hawkish tones but will deliver a couple of more interest rate cuts. That is their track record and whether they do it in July or wait for the next meeting to do it is a matter of fine tuning. However, the market is right in its assessment that there will be one or two more cuts even if the RBI speaks in fairly hawkish language. But that won't change too much. Even yesterday, one saw the bond yield cool down a little bit despite what seemed like a hawkish commentary from the RBI. Hence, we are likely to get a couple of more monetary policies during the year. Maybe one may see inadequate transmission into the banking system. It will not make too much of a difference to either the stock or the bond markets. So, the less we talk about the RBI now being a big trigger for financial markets the better for all of us. Central bank action is in the west and what the Fed does is the fulcrum of whether we will see more powerful rallies or more powerful corrections in the near-term. I think the RBI’s influence on the market is on the win and will probably be that way for the rest of the year.