Mkts entering period of high volatility: SocGen

With uncertainty over US government shutdown and therefore its debt ceiling still looming large, this could be a period of high volatility for all markets, believes Patrick Legland, Global Head of Research, Societe Generale. These uncertainties could also lead to delay in tapering by the Fed, he adds.

However, the tapering delay will not necessarily extend the fund flows into emerging markets. Investors in general are quite cautious on emerging markets, Legland adds. Also read: Overshooting fiscal deficit won't hit India rating: Moody's Below is the verbatim transcript of his interview on CNBC-TV18 Q: How are you reading the latest developments from US? Will we before the weekend get an increase to the debt ceiling? A: We are entering into a period of high volatility. On one side it is likely that a deal solution will be found on the debt ceiling, but it is also likely that it will be a kind of bad compromise. Maybe delaying further decision about the debt, which means that on one side very clearly the US will not make any default for sure, but on the other side the market is likely to be disappointed. Then it would create further volatility, maybe the VIX continuing to go up on and maybe a bit of concern on interest rates and this is not good for US risky assets. Q: Federal Open Market Committee (FOMC) minutes for September indicated consensus that there could be a rollback by December for a Quantitative Easing (QE). In your opinion do you think that it might have become redundant because of the new situation that we are dealing with? A: We do have a conflicting situation; on one side US economy is growing by 1.8 percent, but on other hand there is a very strong dampener by way of 1.7 percent reduction in government spending. However, the overall US economy is continuing to grow at 3.5 percent that is a positive. However, the uncertainties on the shutdown and debt ceiling, is having a very negative impact on the emerging economies. If you take all things into account it is likely that we continue to delay further tapering from the Fed. Q: There has been a bit of money drawn from developed market equities. Certainly there have been inflows coming into emerging market equities through September and early October. Do you think that this fund flow to emerging markets could extend up to the end of the year? A: Frankly, I do not think so. Some investors are clearly looking for a technical buying opportunity because obviously there are some very good rebounds to play in emerging market but there are still too many uncertainties. We also need to take into account that with the overall increase in interest rates on one side, and the risk that maybe from financial institutions have non-performing loans (NPL) on the other side, there is a risk of clearly bad news coming from the financial sectors in emerging markets. It means that investors are quite cautious on emerging markets.