Fed rate hike may drive more outflows from EMs: Rabobank

A summary from the most recent Federal Open Market Committee meeting in October contained the expected nod toward raising the key funds rate in December so long as conditions warrant.Michael Every of Rabobank too believes a December rate hike is a done deal but the questions remains on how aggressive will be their course of action through 2016.The street, he says is pricing in around two-three hikes, well spread over 2016. The December rate hike will be followed by one in the summer and then by the end of the year. However, the Fed decision would be data dependent, says Every.The Fed rate hike will surely be negative for emerging markets (EMs) and they are most likely to witness more outflows, feels Every.Although the Fed is not happy with the strengthening of its currency, it would be hard for the dollar not to appreciate from hereon, more so because everybody else wants to keep their currencies weaker than the dollar. Countries like Japan, China are trying to push their currencies down, says Every.Below is the verbatim transcript of Michael Every’s interview Reema Tendulkar, Anuj Singhal and Sonia Shenoy on CNBC-TV18. Reema: What were your key takeaways from the Fed policy minutes from October?A: It appears that unless we get a big shock in the next few weeks, December is a done deal. However, after that, the question really is how aggressive are they going to be over the course of 2016 and based on the further equity gains that we saw in the US yesterday presumably the market thinks not too aggressive – that is the only interpretation I can make because otherwise the market is utterly delusional to be going up in the face of the tightening cycle. Sonia: What do you expect emerging markets (EMs) to do here on? The love for emerging markets in any case has reduced over the last couple of months; do you see more money getting taken off the table?A: Temporarily I do because tightening cycle under Fed generally as I can keep saying a negative for equities and particularly for emerging markets. It’s unpleasant, it is not something any of us like but it is a historical fact and it will be very difficult for that to be any different this time. Reema: When we say that the Fed rate hikes in calendar year 2016 will be gradual if we do get the December rate hike what is the street pricing in? When could be the second rate hike by the Fed and how much perhaps in 2016?A: The markets are looking at something around two to three hikes maximum over the course of 2016 and fairly well spread. So, if we get one in December, it is possible we don’t get one until summer and then another one towards the end of the year – that is a very gentle pace that they are talking about there. I presume it would again be data dependent. Anuj: Emerging markets generally fear Fed rate hike but anecdotally some of the best rallies have come in a rising US rate scenario. Do you think emerging markets may well create a bottom somewhere around the Fed rate hike and may actually move on from here then? A: Logically, yes because if things go down there is always at some point a bottom, and then from there things reverse. The question is where and when and I think that is a big question mark. I certainly would not want to be trying to call that at this stage when we haven’t even started the hike yet or the hiking cycle and we haven’t even seen any signs yet of how the US economy will hold up that. We certainly hope that the Fed isn't making a policy error in hiking which of course would be quite catastrophic for the US and for all of us. Notably we didn’t see any steepening in the yield curve in the US yesterday, we saw a further flattening and if we continue to see flattening into a hiking cycle that is as worrying a signal as the market consent.Sonia: There is a big spike up that we have seen in the dollar index lately in fact it is getting close to that 100 mark now which is 12-year peak. Do you expect to see more upside for the dollar and what would the concomitant effect be on emerging market currencies? A: I think it is hard for the dollar not to continue to appreciate from here even though it is such blindingly obvious trade. Sometimes you do get a contraction in the market clearly because everybody else wants to be even weaker than that. I mean the Fed doesn’t want a strong dollar, there is certainly no implicit strong dollar policy in place but when you have got the Japanese, European and in future the Chinese over aggressively trying to push their currencies down by default the other side of the see-saw has to go up and that I think will definitely entail pain for everyone in emerging markets who have borrowed in dollars and that is a lot of people.