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Last Updated : Dec 14, 2015 06:08 PM IST | Source: CNBC-TV18

How worried should you be about US junk bond, oil selloff

The market is a picture of red this morning, as Asian shares are trading lower following a further slump in oil prices and as the US junk bond market witnessed a rout recently, ahead of the Federal Reserve's rate setting meeting this week.


The market is a picture of red this morning, as Asian shares are trading lower following a further slump in oil prices and as the US junk bond market witnessed a rout recently, ahead of the Federal Reserve's rate setting meeting this week.

However, investors should not be worried about the ongoing volatility or think of it a precursor to a coming decline in equities, says James Glassman of JPMorgan.

In an interview with CNBC-TV18, Glassman said an oil price decline is generally considered a positive for economies. Consequently, he expects the stock market to fare better in 2016 than it did this year.

Glassman also weighed in the junk bond market selloff, which has seen outflows to the tune of USD 800 million recently, and said it was primarily reflecting the stress facing energy companies rather than the overall economy.

The US Fed will holding a two-day meeting starting Wednesday where it is widely expected to raise interest rates for the first time in nine years - a move some say could have ramifications on asset classes globally.

Excerpts from Glassman's interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy.

Latha: What is the sense you get of the way in which risk assets have fallen all of last week. It was quite a gut wrenching fall especially in commodities; does it find its feet now and wait up to Thursday to just check out what the Fed is saying?

A: I think it is probably more to do with Organization of the Petroleum Exporting Countries (OPEC) and the fear that there is not enough oil supply in the world, more so than the Fed. This debate has been going on forever by the Fed and the market has discounted much of this and the Fed has no intention of surprising with a more aggressive set of move. So maybe it is creating an atmosphere of uncertainty for the markets.

However, honestly, for the equity markets to react negatively like this to a decline in oil prices which is generally good for most economies is a bit odd. I think it is telling you there is uncertainty about the environment that we are entering. However, my suspicion is this is going to be anti-climatic and when the Fed breaks the ice and makes the move and emphasizes the gradual nature of what is coming, my sense is the market probably will find its footing.

Sonia: How does this set the stage for 2016 because so far in 2015 equities has not been a much loved asset, in fact markets like India have fallen almost 10 percent this year. Do you see equities coming back into favour in 2016?

A: I do but the truth is the equity markets are always many sets ahead of reality. The equity has been doing very well over the last five to seven years because the economy has been recovering and everywhere that was the case. However, I have a feeling that if you go back and look at these moments where central banks began to normalize interest rates, they are not really dramatic events.

The Fed reserve is removing stimulus that is no longer necessary. When these things happen you don’t really see these are the events that bring stock markets and economies to an end. It is usually something else further down the road.

So, I think 2016, once we get this uncertainty about the -- the decline in oil prices is a big challenge for the oil industry, I think the full benefit from this is really not visible yet and that will help set a better tone for 2016 once we get away with the fear of central banks starting to think about normalizing.

For the full interview, please watch video.

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First Published on Dec 14, 2015 08:23 am
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