Fed verdict will be data dependent: StanChart Sec

At this juncture, Ben Bernanke does not have the compulsion to spell out the intention of Fed regarding tapering of quantitaive easing, said Steve Brice of Standard Chartered Bank to a query on his expectations from Federal Reserve tonight. He believes Fed's outlook would continue to be data dependent with a eye on labour market while tapering will likely start from Q1 of next year.

StanChart expects US 10-year yields to fall going ahead. "We still haven’t broken out of this 30-year bull market for bonds, so we need to see the 10-year breakup of 2.4-2.5 area for that to be confirmed." he added. Indian economy he said is bottoming out and although there won't be a massive acceleration in growth but most of the bad news is priced in, he added. Brice specified that they are fairly constructive on Indian market than the Chinese market, where growth concerns are likely to remain for sometime. Also read: Mkts to rally utmost 10% if Fed cooperates: Jeff Chowdhry Below is the verbatim transcript of his interview on CNBC-TV18 Q: What is your expectation and do you expect Ben Bernanke to spell out whether the Fed will taper, if yes, how soon and even the quantum perhaps of tapering? A: I think he is going to be quite careful not to specify too much at this juncture. Obviously the genie is out of the lamp with regards to starting to get people to think about tapering. From an economic perspective, we think that the need for him to do something is not that great at this stage because inflation is still falling and inflation expectations are falling significantly. So against that backdrop, we think it is still going to be Q1 of next year before we see tapering. He is worried about credit excesses in the global economy, so he wants to keep people on watch. Q: What is your base case as to what the Fed might say and more importantly how are markets positioned, what might be the reaction post that? A: I suppose he is still going to stick to the data dependent type of analysis. The labour market is also going to be a critical aspect to that. We have seen unemployment rate coming down over the past twelve months or so. A lot of people worried about the participation rate having fallen and are pretty less concerned about that. So the labour market is relatively strong. However, I think this inflation thing cannot be ignored. We have all been assuming as the economy recovers, inflation will at least stabilise if not pick up and the reverse has happened partly due to lower commodity prices and that is something that Fed will be factoring in. Q: If Fed says that it will continue to be data dependent, how will markets behave? We have seen the savage movement of money out of emerging market bonds, and yields have retraced quite a bit, we are only looking at treasuries if you looked at mortgages and those yields, they have risen very sharply in the US, does the genie gets put back or do you see repeats of this volatile, quick, rapid, voluminous movement of money out of emerging markets? A: I suppose the way we look at this is – over last 24 months or even longer, market behaviour has been very much dominated by Central Bank policy. We think we are now looking at a stage where we are getting to more missed- the-market type activity going on, so more discriminating in terms of looking at the fundamentals. So, we should be getting used to far more volatility around this theme. The genie cannot be put back in the bottle at all. So the next move is still likely to be tapering and there is going to be a lot of speculation around that. Q: Tomorrow if the Fed were to say that it will be data dependent, logically the market will start speculating on what will it say in its next statement or when will it start hinting at receding the amount of dollar printing. Therefore, how are you expecting asset classes to move? Do you expect a slow movement from bonds to equities, how do you see US yields moving and as a consequence of that, how will emerging market and developed US equities move? A: I suppose in terms of yields, we expect them to fall a little bit on the back of Bernanke statement. In terms of equity markets, we have seen significant weakness. We have already started to see people deploying cash into asset class in recent times and I think that is something that we have to be aware of. There is a lot of the cash on the sidelines. So probably people are looking at this weakness, as an opportunity to deploy that cash and that should be ultimately positive to equities. Overall, we are probably saying - we have got through a period of volatility, we will get back to this but maybe we will get a period of stability in the near-term. Q: We saw the 10-year bond yield in the US market harden, it was at levels of about 2.13 percent, it has gone to levels of 2.17-2.18 percent what is that indicating to you? A: I suppose at the end of the day if we do see the inflation reaccelerating then you are not going to get a positive real return on treasuries and that is why people are backing this up, as well as probably Fed tapering expectations. That said we still haven’t broken out of this 30-year bull market for bonds, so we need to see the 10-year breakup of 2.4-2.5 area for that to be confirmed. Although the move has been quite sharp over the last six weeks, in a short timeframe but we still haven’t broken to that key resistance for the 10-year bond yield. Until we do that, we are probably looking at fairly rational and not excessively volatile behaviour in that market. Q: We are more worried about flows into emerging market bonds and more particularly into emerging market equities. The Indian bond market of course saw a goodish bit of USD 3 billion flow out in the last four weeks, do you see that trickle continuing, not a flow but at least a trickle continuing in terms of an outflow. A little bit of it rubbed on into the equity markets as well, how would you approach Indian equities - do you think that outflow at least will stop as the Fed signals some kind of continuation of the current regime? A: We still have a preference to developed market equities over emerging market equities. So that is the theme we have been stressing for sometime and see no reason to change that at the moment. The momentum is still very strong in that direction. From an Indian market perspective though, I do not think we are excessively concerned about this. We generally believe that the economy is bottoming out. We are not expecting a massive acceleration in growth there but we do believe that a lot of the bad news is already priced in and that is why we are fairly constructive on the Indian market probably more so than we would be the Chinese market at this stage where we think growth concerns are likely to remain for sometime.