Mkts more prepared for Italian referendum after Brexit: Parsons

Markets are more prepared for Italian referendum after Brexit, believes Nick Parsons, Head of Research – UK & Europe, National Australia Bank. Same template as the US Election Day is playing out again. Speaking to CNBC-TV18, Parsons said that no surprise moves are expected to come from US Federal Reserve in its policy meet. Fed, he said, ought to be one of the least market moving events over next few weeks. New economic projections are more important than FOMC meet. Below is the transcript of Nick Parsons’ interview to Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: Do you think that investors have put this event behind them and do you reckon that there could be more gains especially for the Europeans markets?A: It seems that we are following the same playbook that we did on US election night where there was a move very sharply into the red and then quite a stunning turnaround. And perhaps that is now the template for these major global events. So, we have got a situation where only three hours ago, the Standard and Poor (S&P) futures were down seven. They are now up nine and the DAX in Germany, which was down 100 points is now up 180 points. So it is very much a re-run of November 8 in Europe at the moment.Anuj: And maybe even the Brexit day template before that. So, shall we now make an assumption that this market is now prepared for more bad news out of Europe? A possibility of a Europe breakdown, euro dollar going below 1 and if these events actually happen, they will be more of buying opportunities for equity markets?A: I am not so sure. I would rush to that conclusion for equity markets. What does seem to be the case is that markets were very much more prepared this time around, because of course, you mentioned Brexit and we mentioned the US Presidential elections, it would be a very brave or a very foolish investor who did not at least have some form of downside protection in place, just in the event of a catastrophic vote followed by an equally catastrophic collapse of the banking recapitalisation which is currently ongoing.So, the markets were better prepared for this one. And that probably explains why the downside initially was relatively limited and we did see such a turnaround. But I would say that the outcome of the banking recapitalisation should be front and centre stage from here because if there is any sign that that is faltering or indeed failing, then that is going to be an unexpected negative for investors right now.Sonia: Do you think that the Federal Open Market Committee (FOMC) meeting next week will also be a non-event of sorts, purely because everyone is expecting a rate hike and it seems like that is baked into the markets now?A: It would be simply staggering if the Fed were either to do nothing or to do 50 basis points. Having spent all year passing up every opportunity to raise rates, it would be quite incredible for them to rake a 50 and equally, it would be non-sensical if they were not to move at all, having got the market exactly to fully discount it. So, the Fed ought – and I use the conditional tense – to be a non-event for the markets. But of course, what we will be focusing on there is the fact that we get new economic projections, we get a new set of dot points to agonise over and analyse over in the coming days. So, the Fed ought to be one of the least market moving events over the course of the next few weeks. But their capacity to surprise and their capacity to foul up communications should never be totally ignored.Anuj: The other big point that I have been asking experts is this whole developed markets (DM) versus emerging markets (EM) trade, we have seen the US markets of course, hitting all-time highs. Do you think that has run its course and is it time for emerging markets to bounce back or do you see more outperformance for the developed markets?A: What we will see is investors continuing to watch currency movements because we often, we always stress that when the currency and the equity markets are moving in the same direction, then that is the basis for a sustainable rally. At the moment, we are just in that process, performing a bit of a base, it would seem in EM currencies. In India, we have come down from those all-time highs, in dollar rupee, just a couple of weeks ago. When we are trading above 68.80 per dollar, we have managed to stabilise on a 68 per dollar figure. If that stability can then, morph into a bit more of a general outperformance by EM currencies, then that would be the sign for investors to move back into the equity markets. But the first clue has got to come from the currency. And so, unless and until we see a bit more of a sustained uptrend and it is certainly encouraging, the price action that we are seeing in some currencies, not least your own, but until we see that rally being extended, it is probably too soon to make the call into EM equities.