'Debt ceiling issue to sort soon; fears of US mkt fading'

David Kelly, Global Strategist, JPMorgan AMC expects the US government to reach an agreement on the debt ceiling in next two days. "US president Barack Obama has already said he will not negotiate with a gun on his head, but once the government reopens short term and the debt ceiling is extended, the President will be willing to negotiate to with the Republicans," he said.

Speaking to CNBC-TV18, he said, at the moment, there is not much of a fiscal drag on the United States. There has been a lot of improvement, the global economy is doing better and there has been substantial improvement in the housing market in the United States and all of these things are leading to strong economic growth, he added.

Paul Mackel, MD & Head of Asian Currency Research, HSBC, on the other hand says the market seems to think that some good discussions are actually occurring behind the scene, so the sense of fear that was evident in markets earlier this week is fading away.

Meanwhile, he feels the positive sentiment for the Indian rupee, which has been coming through over the last few weeks still has some traction.

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Below is the verbatim transcript of David Kelly & Paul Mackel's interview on CNBC-TV18

Q: Can you put into perspective what the toing and the froing mean while the house had made an offer that they are willing to extend the debt ceiling. We last hear that Obama has rejected that offer; do you think the market is still going to take positive cues from this?

Kelly: Yes, I think so because they are coming very close to the deal. There has been a deal that’s been possible all along, which is the short-term suspension of the debt ceiling and a short-term reopening of the government while they negotiate. The President has said that he will not negotiate with the gun to his head but once they agree to reopen the government short-term and extend the debt ceiling short run then the President will be willing to negotiate to some extent with the Republicans and I think it will reach that agreement relatively shortly in the next day or two.

From the perspective of the Republicans, it makes no sense to try and force a continued shutdown of the government and expect that the President will negotiate because he won’t and so they know that and this is much more to do with politics than economics or finance in the next day or maybe few days, we will see the government reopen, we will see the debt ceiling suspended for a while and there will be some negotiation on longer term issues which hopefully will resolve for this now.

Q: How are you reading the same situation that David Kelly spoke about and a word more on the Indian rupee if you are tracking that closely, there is a lot of buzz about Indian policymakers talking to several bond index guys at JP Morgan and other bond index people to check out how Indian bonds could enter those indices. We understand, these are very preliminary but do you think all this including the trade deficit numbers call for something positive on the rupee?

Mackel: To answer your first question about the US government shutdown, I think the fact that there is more evidence of over dialogue coming across the wires and the market seems to be of the view that there does seem to be some good discussions actually occurring behind the scene. So I think the sense of fear that was maybe more evident in markets earlier this week is fading away. So there is some optimism slowly coming through on that type of story. With regards to for something like the Indian rupee, I think that the positive sentiment for the currency, which has been coming through over the last few weeks still has some further traction to be maintained.

I think that as you mentioned these discussions about whether India could be included in some of these major Asian bond indices will be quite constructive, but like you said, it is also a function of the trade in current trends that have been unfolding and maybe not as bad as some people thought. We are of the view that dollar-rupee will end at 62/USD come the end of this year.

Q: It is not that the market ever though that the US will default or didn’t even see the US equity market selloff. So, if according to you the agreement on the debt ceiling is reached very shortly, could we expect a big rally in the US markets on the back of that or may not?

Kelly: I think we have already seen some rally. The US market could move forward some more because before this shutdown of the government occurred, the US economy was set to accelerate. There isn’t in fact much fiscal drag right now on the United States, there has been a lot of improvement, the global economy is doing better and we have seen substantial improvement in the housing market in the United States and all of these things leading to strong economic growth. So, the US market was set to move higher and US interest rates are set to move higher once this problem is resolved.

Q: How are you going to read the situation from now to end of 2013? Emerging markets have seen some decent flows, India saw very good flows at USD 2.4 billion since September 1, how will flows behave if the debt ceiling is resolved and you see some strength in the dollar?

Mackel: I think there are a lot of investors who need to deploy capital into the end of the year. That used to make the high yielding currencies do relatively well because although this shutdown has the capacity to be resolved, you are still pushing back your timeframe for when the tapering by the Fed will start.

With that I think that this very positive dollar story which was evident in Q2 this year is probably not going to really become more evident until Q1 next year even into the second half. So I think that going into the end of this year, you still have this view that dollar-rupee will stay relatively stable, high yielding currencies in Asia as a whole probably still continue to do okay.