Crude unlikely to test key level of USD 120/bbl: Mirae

Brent crude steadied near USD 116 a barrel on Thursday as traders await US Federal Reserve’s policy decision, which may include further stimulus action to boost the world's largest economy.

In an interview to CNBC-TV18 Bill Belchere of Mirae Asset Securities pointed out that another round of easing would lift commodity prices including crude, which is concerning. "If this is not a sterilized intervention then the increase in supply of dollars would drive down the price of the dollar and raise commodity prices," he added. However, given the slowdown in global economy, injection of additional money now would not have much of impact on commodity prices especially crude, than in past, he added. According to him, USD 120 per barrel is a key level for crude. "Whenever the oil price has gone up above USD 120 per barrel that has eaten into real purchasing power, the economy has slowed down; there has been a collapse in the surprise index and the equity markets," he explained. But he doesn't see crude prices heading there. Below is the edited transcript of Belchere’s interview with CNBC-TV18. Q: What exactly is your view with regards to what the FOMC could deliver tonight and how much of it has already priced in? A: Given the poor payrolls result for August and that the economy is not generating as many jobs as the Fed feels is necessary, they will step in here. They will move the language out to suggest that they will be on hold until 2015, they may even go ahead to intimate that they are moving in that direction, that things will stay easy until unemployment gets below 7%, as long as inflation remains below 3%. They will also announce an asset purchase programme. The big thing that is missing in the US recovery is the recovery in the construction sector, which generates so many jobs. So you do not want to hit that mortgage sector pretty well. You would want to go into your mortgage backed securities. Then perhaps you need something to encourage the banks to lend because you can clear up the mortgage side, but if the banks still won’t lend then you have got to do something there as well. This could be fairly comprehensive. I believe there are some people who suggest that perhaps they won’t move because of the elections, but if you look back through the elections, the Fed has moved 10 out of the last 15 elections in the September period, so that has not helped put them on the sidelines. Q: There were some analysts who did the calculation that after the first round of QE, crude prices went up by 50% and after the second QE; it went up by another 30%, what will be the impact this time around? A: That is the concern and one of the side effects that it is likely to lift commodity prices particularly, if this is not a sterilized intervention. The increase in supply of dollars would drive down the price of the dollar and raise commodity prices. It would be more of an issue if the global economy was not slowing down. But, the trends across the world whether you are looking in China, the US or EU, all show a very weak growth as we move ahead. So, it won’t translate into much of an impact as it has in the previous rounds. _PAGEBREAK_ Q: Do you think USD 120 per barrel is possible? I am specifically referring to USD 120 per barrel because in the past as other analysis point out that level has triggered a slowdown whenever crude touches that level, is that likely this time around? A: You are absolutely right. What we try to look at is the economic surprise indices and those generally lead the equity markets. Whenever the oil price has gone up above USD 120 per barrel that has eaten into real purchasing power, the economy has slowed down; there has been a collapse in the surprise index and the equity markets. We do think USD 120 per barrel is a key level, but we do not think we are going to get there. Q: We also got some positive news from Germany yesterday but the European markets didn’t see much of a runaway rally possibly factoring in the fact that it was already priced in to the European markets. Do you think that the main risk that we were suffering from in terms of Europe is now removed? A: The downside risk is removed; it is just the process by which this unfolds. It would make a lot of sense if the Spanish went ahead pre-emptively and asked for a package. It will boost the market that this is working out and does put a floor under things. But if the bond markets have to get out of control before the Spanish goes to ask for help then there is a bit of a messy period getting from here to there. We think that the latter maybe the case. Q: Year-to-date (YTD) the Indian markets were outperformers in an emerging market basket as well as compared to other Asian markets, the explanation appeared to be that markets which are more domestically be oriented and then less dependent on global especially, Western trade have done better in 2012, now if there is another gush of liquidity, who might you think will be the equity outperformers globally? A: The defensives are expensive relative to your high beta cyclicals, so you might tactically want to take a position on the high beta – overweighting on your high beta and ride those for a little while. Then you can see how this whole global situation evolves. Q: We have seen a strong run up in the Indian markets, we have seen a lot of funds or FII commitment in terms of cash for our markets in the recent past as well, give us a sense of how are FIIs approaching the Indian markets and how are we placed vis-à-vis other emerging markets at this point in time in terms of allocation of fresh ones? A: From my discussions with clients, it does look that people are becoming interested in the India only because it has been such a poor performer in terms of economy. On the policy side, you expect that things will get better in the period ahead, so that has brought some attention and interest. Moreover the Indian rupee being so weak, potentially gives you some upside there as well.