More than rate hike, eyes on Fed commentary: JP Morgan AMC

Ian Hui, global market strategist at JP Morgan Asset Management believes that more than the actual rate hike by the US Federal Reserve that will be announced post the FOMC meet today; it will be the commentary by Janet Yellen that will be keenly watched – the trajectory of rate hikes through 2016.If the Fed wordings suggest a gradual rate hikes through the year then market but if they suggest at aggressive hikes then one could see volatility. However, in case of emerging markets, he expects them to be volatile post the announcement and with regards to India in specific, he thinks the market and rupee both may fall a bit. The house agrees with the Fed's dot plot view of 3-4 hikes in 2016, says Hui.According to him if the US economy shows stability going forward then it would be positive for risky assets and they would rally. Below is the verbatim transcript of Ian Hui's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18. Sonia: By tomorrow the Fed overhang will be out of the way, if the rate hike does come in then do you expect to see a relief rally across markets globally? A: When the Fed makes its decision, I think that depends also on the wording of the Fed decision. A lot of investors and the market will be seeing what the Fed suggests or what they do in the future. In my opinion if the Fed says gradual slow rate hike, slow pace going forward into the future, the market will rally. If they say something more aggressive or higher, we might see a bit more volatility going forward but it will depend on how the Fed will give the statement. Latha: The last statement we have, the dot-plot of the Fed indicated four hikes and the Fed fund futures as we know are looking at or pricing in only three hikes next year. What is the market pricing in now in terms of the dot-plot? Is it indicating that four hikes will be repeated tomorrow or is the market pricing in that the dot plot will show fewer hikes in 2016? A: I think what the market thinks looking at the Fed Futures; they do not seem to agree with the Fed's dot-plot about three-four rate hikes next year. They seem to be pricing in around two at the moment. They do not think that it is not as aggressive as the Fed thinks. Our view at JPMorgan is that we agree with what the dot-plot which the Fed says. We are still looking at three-four rate hike next year, roughly around one rate hike per quarter based on the strength of the US economy. Of course that might turn if the numbers turnout a lot worse as we go forward into the year but our view is that yes, we are still agreeing with the Fed's dot-plot at the moment. Sonia: So three-four rate hikes is what you are expecting in calendar year 2016? A: Yes. Sonia: If the Fed goes ahead and hikes rates and the tone of the Fed suggests that the US economy is in positive trajectory and has the ability to withstand the rate hikes then do you expect risky assets like equities to rally in the first half of 2016?

A: I would because if the Fed does make an indication that things are looking up and that they see the US economy still being stronger. However, usually when we have a tightening cycle, it tends to be more positive for equities over bond. So we still be more positive on risky assets overall.

Latha: What about risky assets in the emerging markets. Do you think tomorrow some kind of differentiation will come in with developed markets being preferred over emerging market bonds? Will there be a selloff there?

A: I think that if the rate hike does come, the initial reaction in the emerging markets will see some volatility. While we do know that this is one of the most expected and most discussed Fed meeting in quite a number of years. Most people have priced in expectations of a rate hike in the US. However, when it does hit, I think people will still panic a bit especially in emerging markets. So I still expect when the actual decision gets announced tomorrow, still going to see quite a bit of volatility in emerging market equities and bonds.

Latha: The Nifty at the moment is 7,700. What should we brace ourselves, for a 100 point fall tomorrow and the rupee is at around 67/US. What should we brace ourselves - 67.50/USD?