FOMC meet to decide risk rally; hopes high on QE: SocGen

Benoit Anne, MD, head-EM strategy, Societe Generale, explains to CNBC-TV18 that if the Federal Open Market Committee (FOMC) meet on Thursday announces anything positive, then there is a high probability of the risk rally extending over the next few weeks. Benoit Anne adds that the markets are desperate for action and overall, there is a very strong possibility of the Fed implementing the third round of quantitative easing.

Below is an edited transcript of the analysis on CNBC-TV18. Q: Can you give us an overview of the current situation?
A: I think the market is quite positive in the near-term for risky assets and that includes currencies in the emerging markets. So, the risk will be more sustained and obviously, the last but not least, major hurdle for global markets is the FOMC decision on Thursday.
If we do get this green light tomorrow, then there is a high probability of the risk rally extending over the next few weeks. It has been a very significant week for global markets and I can see the risk-on having a good chance of being sustained a little further. Q: If there is a hint of QE from the FOMC on Thursday, do you think this the risk rally could have considerably more legs?
A: Yes. The markets want to see action than words and we are comfortable with the view that there is a strong chance that the Fed will go ahead and implement QE3. And that will be very positive for risky assets. Q: The European markets have all of today and tomorrow to react before the FOMC decision is announced. Do you think that the markets have reacted adequately to the German decision or do you think there will be a bit of selling and lightening in positions in the next 48 hours?
A: That is a good point. Squaring of positions is likely to occur ahead of the FOMC because it is a major even-risk and from a risk management perspective, you do not want to take too much of a direction or stance ahead of that as a portfolio manager or investor. So while fundamentally the market looks much more constructive ahead of the FOMC, you are going to see some positions squaring. Q: The EU finance ministers' meeting is scheduled on Friday. Are you expecting Spain to ask for aid? Now that the ESM decision has been announced and the ECB has outlined the terms and conditions, does Spain know the terms that need to be followed before it approaches the regulators for aid? What have the European Union and the German court commented regarding the conditions for Spanish banks to be given money directly by the EFSF? Are there any more procedures to be followed or will the funding start now?
A: I am not too concerned about the situation in Europe. I think we are moving forward and Spain will probably be treated as partner in this initiative and there are no concerns on that front.