Bernanke seems schizophrenic; tapering by Sept: Eastspring

Emerging markets are all ears ahead of the hearing on the Fed's semiannual monetary policy report later tonight. The Federal Reserve Chairman Ben Bernanke is expected to balance a message of enduring central bank support for the US economy with a reminder that the Fed's ultra-easy policies cannot last forever.

“Never under estimate Bernanke’s ability to out dove the market,” says Nicholas Ferres, investment director (global asset allocation) of Eastspring Investments, who feels the chairman has been a little “schizophrenic”. Bernanke has gone back and forth on the timeline for the tapering of the Fed stimulus programme, turning the market into a nervous wreck.   This time around analysts feel the head of the US central bank will probably seek to use his testimony to Congress on monetary policy to calm the nerves of jittery investors worried about life without the Fed's USD 85 billion in monthly bond purchases. “The trend in the US Labour market suggests the Fed is probably on track for a September tapering of its quantitative easing programme,” Ferres told CNBC-TV18. Below is the verbatim transcript of his interview on CNBC-TV18 Q: Emerging markets (EM) are watching very carefully for what the Federal Reserve Chairman may say later this evening. Do you think he will continue with that not easing so fast kind of tone or do you think it is going to be something different? A: I have mentioned on your program earlier that my sense over the last couple of years is never underestimate Ben Bernanke's ability to out dove the market. However, my sense at the moment is that he is a little bit schizophrenic. Broadly speaking, the improving trend in the US labour markets suggest that the Fed is probably on track for a September tapering of its Quantitative Easing (QE) program, but on the positive side inflation is still relatively subdued. So, they are probably in no major rush to do it. Q: What do you expect him to say at the testimony today? He seems to be speaking in many voices as you said. Do you think having reassured the market just 10 days back, would he once again talk about the prospect of tapering in tonight's address? A: He may not address the issue directly, but I suspect the reason he changed his tune a little bit a week or so ago was that he was probably concerned about the disorderly rise in yields. So while the direction of treasury yields probably does not worry him he is probably concerned that the yields are rising too rapidly and that that may actually impede what he is trying to achieve, which is a robust recovery in the housing market and in the economy more generally. Q: Where do you stand on EM performance? Do you think what happened in the last one week is just a pullback or do you think we have started on an uptrend again or at least struck out some near-term outperformance for a few weeks? A: We have actually been adding some EM positions. A couple of weeks ago we added Hang Seng Composite Index (HSCI) or a position in China, albeit about 5 percent of our risk budget. We have also added a position in Turkey for similar reasons. We think the valuation in China is even cheaper. It was interesting, yesterday Merrill Lynch's Global Fund Manager Survey suggest that the positioning towards China related assets or EM in general and also commodity-linked assets or markets, is extremely underweight. And investor sentiment on China, EM and commodities in general is extremely pessimistic now. So, we actually see that as a positive sign given valuations are starting to look quite interesting in some of those markets and that was part of the reason why we have started adding to positions. On the negative side, I do worry that the EM currencies are still under a little bit of pressure not withstanding what happens with the Indian Rupees (INR) over the last couple of days. In particular our point of view is to the price action in Brazilian real which has continued to sell off over the last month or so, inspite of the Brazilian central bank raising rates and that price action is actually quite disturbing, because it was similar to what happened in 2008. Q: Do you hear of other investors taking a specific call on India right now? A: I am not at the moment. I mentioned a month or so ago that I thought India was looking interesting. However, I was actually quite disturbed by the actions yesterday. Clearly the central bank is trying to stabilise the currency market and bring in some two-way price action, but the question your viewers ought to ask themselves is that what happens if it does not work. If the INR continues to sell off or the dollar strengthens, it may actually be a sign that there is a disorderly scramble for US dollars. Hopefully the actions will work.