While this is an alarming time for most emerging markets globally, a recession in the US could actually come as a relief, Maneesh Dangi, Founder, Macro Mosaic Investing, noted in an interaction with CNBC-TV18 today.
Interest rates in the US have been kept high for domestic reasons, particularly high inflation, affecting emerging markets globally, backed by an appreciating dollar. Despite the turbulence triggered in the global markets, the Fed has, time and again, reiterated its message of keeping rates higher for longer, indicating a rate cut is unlikely any time soon.
A solid US economy, at the moment, as is reflected by the strong macro indicators will deter the Fed from introducing rate cuts, thus, raising the spectre of a hard landing.
The US treasury yields cooled after hitting stratospheric levels. The 10-year Treasury notes touched 4.884 percent, a fresh 16-year high, while 30-year Treasury yields rose above 5 percent for the first time since August 2007.
In this context, Dangi, in his interaction today, stated that there's a significant divergence between fiscal and monetary policies in the US and that is the source of turbulence in global markets.
Dangi also projects emerging markets in most economies to continue facing headwinds.
With regards to the US recession, he noted that the recession will come as a relief while cautioning that most emerging markets will be seeing an alarming time. He stated that Asian and European markets will see turbulent times over the next few months, owing to surging energy prices, China's stressed balance sheet, and a tighter dollar value. According to him, an accident is imminent in these markets in the next six to 12 months, which will also impact the equity market in India.
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At the same time, he noted that accidents projected in most economies outside of the US are not income-driven but related to the balance sheet bust.
Credit markets around the world follow the Treasury Bond movements in the US. Besides, the cost of credit flares up proportionally with a hike in interest rates. This spills over to other sub-markets as well, including bank loans to mortgages, which develop higher borrowing costs. Thus, a rise in the cost of capital will impact consumption, manufacturing, as well production.
Further commenting on the balance sheet back home, Dangi, however, said that currently, India has cleaner corporate and household balance sheets which are not stressed at the moment. "Since the financial crisis of 2008, most economies have faced balance-sheet-related headwinds, due to tighter dollar or higher interest rates," added Dangi.
He anticipates an income slowdown in the Indian economy due to high interest rates, and surging crude prices, which will impact the consumption capacity of the retail household.
Also Read: RBI likely to keep banking system liquidity tight, say experts
Commenting on the current mortgage rate in the US, which has hit a 30-year high, at 7.8 percent, Dangi clarified that most mortgages in the country are fixed rates, and are, hence, insensitive to higher interest rates unlike in Europe which has variable rates.
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