NFP data to exceed expectations; tapering in Jan: UBS

Ramin Nakisa of UBS Investment Bank is of the view that the non-farm payroll (NFP) number out of the US will exceed expectations and so the Fed is likely to announce the start of tapering on its meeting on January 29.

Announcement of tapering could bring about a sea change in foreign exchange in January, which would lead the dollar to strengthen against other currencies like yen, euro, which in turn would be good for Japanese and European equities but bad news for emerging markets, says Nakisa.

However, he says: "If we do see a big sell-off that might be good point to get into emerging market equity."

Also read: Why we're not keen on US stocks: Credit Suisse

Below is the verbatim transcript of his interview on CNBC-TV18

Q: The markets are in a wait and watch approach ahead of the jobs data coming out from the US. What is your expectation on the non-farm payrolls (NFP) data and do you think that it would give some more clarity on the taper timeline?

A: I think it is likely to be very positive given the numbers we have seen up to this point. So we are quite bullish about what the number is going to be. We think that on January 29, the Federal Open Market Committee (FOMC) will announce the beginning of tapering.

At the moment market is just far too positive about the outcome. We are expecting a shock for the market because we do not think that is priced in at all. If you look at the volatility of the markets they are showing very low realised volatility and implied volatility. So certainly they are not pricing in a correction. Also we are expecting a jump up within yields for US treasuries; we do not think that is priced in yet. We have seen yields slowly trickle up back towards 3 percent level that they hit before. Currently we are around 2.87 percent for the 10-year.

So I think we will see a shock in markets and I do not think that is priced in at all at the moment.

Q: When you say shock what do you mean? If you could just quantify your expectations on what the NFP number today could be? What the quantum of tapering will be come 29th of January and therefore what the impact on the emerging markets could be?

A: I think the payroll numbers will exceed expectations. If you look at the volatility of markets, for example the S&P Options, the probability that they are pricing in a jerk fall of more than 10 percent is very low. In other words if you believe that they will fall more than 10 percent you can buy very cheap protection or do an outright play with a Put Option, for example a Put spread to take advantage of that. So I think that is how we would approach taper at the moment.

Q: What would that mean for emerging markets? Should we be poised for some amount of volatility come on the currency as well as on the Gilts?

A: Definitely. This will be the sea change moment for foreign exchange (FX) in January. I think that will be the point to which dollar weakness will end, so the dollar will start to strengthen, the Yen will weaken, the euro will weaken. That will be good news for Japanese equity, good news for European equity and bad news for emerging markets, simply because we see a repetition of what happened with the sell-off of those double deficit countries earlier this year. So I am thinking in particular the Indonesian rupiah, the Malaysian Ringgit and to a lesser extent the rupee.

For emerging market this might be a good entry point. If we do see a big sell-off that might be good point to get into emerging market equity.