In an interview to CNBC-TV18, George Hoguet, Global Investor Strategist at State Street Global Advisors spoke about the collapse that we have seen across global assets.
Below is the transcript of George Hoguet's interview with Reema Tendulkar & Mangalam Maloo on CNBC-TV18.
Reema: The problem is when the mother market see such kind of a meltdown, S&P is already in the correction zone, which means it has fallen more than 10 percent from its May peak, what according to you is the way forward, are we in for more downside?
A: I think the markets will be very attentive to what happens in China and particularly the policy response of the Chinese authorities both in terms of fiscal policy and monetary policy. What led to this recent round of volatility was a much worse than expected purchasing managers' index (PMI) numbers out of China. So all eyes will be focused on China.
Mangalam: Could you also give us a sense that yesterday while the Dow Jones opened about 1,100 points lower, it did recoup most of the session's losses, so is there any positive for one to take from there or do you think of that recovery as just a one-of?
A: I think we are in a crisis of intense price discovery and expectations have changed rapidly with regard to the posture of the Federal Reserve, so the chance of the Fed raising rates are actually below 30 percent. I think the fundamentals of the US economy remains strong and the labour market is strong but earnings for the S&P 500 have been hit by the strengthening dollar.
Reema: You indicated that a lot depends on the policy response from China, what according to you is the base case scenario that the market is working with with respect to a fiscal or a monetary response from China and is it going to be enough to stem this downslide?
A: I think that the market does expect that there will be a policy response from China. Real interest rates in China are quite high. What disturbed the market or caught the market by surprise, I should say, was the gyration of the renminbi and the redetermination of the exchange rate fading mechanism. The consensus still holds that the Chinese economy will grow at about 6.9 percent on an annualised rate over the next six months. So I think that we can derive some comfort from the fact that the market rebounded but obviously with the volatility index (VIX) well over 20, people are nervous.
Mangalam: In that case what is your base case scenario for the Fed now and what do you think will be the action taken by the Fed keeping all these global factors in mind?
A: I think the Fed will continue head up to the day right before the meeting to be very data dependent. The meeting is not until the midmonth, the 17th and they will obviously look at the state of asset prices and what is embedded in expectations; inflation and otherwise.
Our base case is that the volatility will fall and the Fed will proceed to tighten but there is a lot of uncertainty about that and some influential commentators including Larry Summers was saying that the Fed should not. So there is a lot of disagreement but our base case continues to be that the Fed should tighten and will tighten.
For entire discussion, watch accompanying video...
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