Citi says high chance of mkt inching up post consolidation

Mohammed Apabhai of Citi says the move in the US 10-year yields had caught market by surprise. US Treasury debt prices rose on Tuesday, pushing benchmark yields below 2% for the first time in over four weeks as worries about the pace of global economic growth bolstered demand for safe-haven US government debt.

Benchmark yields were still being impacted by March US jobs growth that came in well below expectations last week, casting doubt over the strength of the US economic recovery. In this environment Apabhai says he is advising clients to be cautious and use options to hedge.
For the near-term, he believes, European cues remain the driver for global markets. "I think sovereign risks have reduced and the correction may not be a sharp one," he told CNBC-TV18 in an interview. 
He thinks there is a high probability of the market inching up post consolidation. Below is the edited transcript of Apabhai's interview on CNBC-TV18. Also watch the attached videos. Q: Last couple of weeks flows into India have dwindled quite considerably. Are you sensing any degree of risk off in the global environment off late because of the recent news flow?
A: Yes, I think the sentiment seems to have changed in the first week of this month. Certainly we are caught off guard a little bit with the move in the bond market. I hadn't expected the US to be as violent as what had happened. I had thought that ten year bond yields would be probably close to 2.5% rather than 2%. The other thing that did happen was that the money market stress started to build again in the European situation with Spain. The five years credit default swaps (CDS) in Spain back towards the highs from last year started leading people to become a bit more concerned.
Yesterday, we suggested to people that we had become not outright bearish but probably cautious. So we were telling people yesterday was that if they can use options than to be buying strangles basically there is a possibility of the market moving either 5% up or 5% down from here depending on what happens.
One of the reasons why yesterday was so important was that we reach the levels where investors in the US and across the rest of Asia have given back all the gains that they had built up since the start of the year. So at that point what they needed to do is to double up or they need to quit those positions.
Yesterday we saw was some comforting segments from the ECB saying that they may be using the money from the stability fund to buy Spanish bonds. Noises from France and Germany said that they didn't think that Spain was in the problems that the market thought that they were in and provided that with some comfort. It said that today this morning's action in Asia has been fairly anemic, markets are very much flat and we will have to see what Europe does when they come in a couple of hours time. Q: Is that what you would quantify though as the downside price risk just about 5%. It seems like a token correction and some people have been pointing out that this could be the start of a turn in equity performance?
A: This is one of the things that makes it so difficult right now. The start of Q2 has been much more difficult than the start of Q3 where we were near the bottom of the trading range. We had additional liquidity coming in and it was a relatively easy call to make that the markets were going to go higher. Right now we don’t know whether the situation in Spain is going to improve or not.
Our view is that it probably isn’t that the situation is very different now than it was eight months ago. There has been a lot more progress made in terms of ring-fencing the banks, in terms of providing funding for the various European programmes.
However it had people capitulating now or whether it is on Chinese concerns, whether it is on US growth concerns and earnings concerns or whether it is on Europe then you would probably get a move down about 5%, which is a normalized correction.
But if at that point you also started seeing problems in Spain and money market stress increasing then of course the potential for 15% down move in the US and in Asia that would lead probably about 20-25% down. That would be the scenario you are looking at but I must stress again that is not our core scenario. Core scenario right now is either up probably 8 down 5 with the markets telling us there is probably 7% probability of the move down 15 which when you work all out basically puts the market back to exactly where it is right now.
So the view is right now this isn’t the time to be taking the massive swing at the markets that there are times when you want to be buying. Right now the probabilities of an up and down move are fairly even and we need more data coming in. There is a lot of macro events happening next three weeks which could move this market in either direction. So for now, recommending it to keep it relatively tight and wait to see what happens with the slight bias on the upside. Q: Give us a word on the Nifty which is also bobbing above its important support level. Do you expect this 200 DMA broadly 5,150-5,200 to hold out?
A: India is one of the markets that could be fairly vulnerable because of these capital gains talks that are being talked about. One of the reasons why we think India is holding up is primarily because it seems that many foreigners, at least from our numbers, don’t have that many gain. So even if you brought in the capital gains tax right now, it wouldn’t make a huge amount of difference in aggregate to the whole market.
But that is not to say that it is going forward and it may be a drag on the market. One thing that is very significant about India is that foreigners have been in a love affair with the Indian equity markets for the last three years. We are not seeing any significant outflows for the time being. We have obviously got Indian earnings season coming up as well. So for now as well, India has got the potential to cap on the downside but for now I think things are very stable and it is going to be very much a macro call.
One thing that we are seeing is that the correlation between markets have actually picked up again. So we are back to this risk-on and risk-off period, which had sort of died away a little bit. Since the end of February, it seems like it is coming back. So a lot of news coming out, but I think we still need more information before we make a call in either direction.