‘Few in Asia think the Fed is going to raise rates’

With just days to go for the big Fed decision, the key question is — will the world see the first rate hike in almost seven years? What will be the impact of a possible hike on emerging economies like India? Bloomberg TV India spoke to Mohammed Apabhai, Head of Asia Trading Strategy at Citigroup, on the Fed impact.

What in your opinion is the Fed likely to do? And if we do see a lift do you think there is going to be enough strength, given the volatility we have seen in recent times across equity and currency markets?

It is a very interesting question. This is the one that is focusing the market attention right now. Most participants are sidelined ahead of this Fed meeting. I do follow what the consensus is on the street. And that has been moving lower. Now the market is very evenly divided over “a hike or not a hike”.

If it does come about it is likely that the market will be quite surprised about this hike, regardless of all this signalling. I have spent a lot of time in the last few weeks talking to clients about markets as this is a very interesting time. The point that is very clear is that there are very few clients in Asia who actually think that the Fed is going to be raising rates. I think that is predominantly as a result of a concern over what is happening in China.

How is the money moving at this point? We have seen consistent selling at this point when it comes to global emerging market funds. We have seen 19 straight weeks of outflows coming in and it is obviously impacting countries like India as well…

Yes, there has been a lot of de-risking happening, especially in the emerging markets. Also, markets that were held very well, like Europe, have seen a fair amount of de-risking as well. I think some of these indicators of flows are getting to fairly low levels if not extreme levels. You can look at things like the outstanding units in the emerging markets ETFs. You can look at the amount of margin levels they are in Taiwan, at short-selling in Hong Kong and Japan.

So what this is telling us is that a lot of de-risking is happening. De-risking is happening very much through the futures markets as opposed to the cash markets as — especially in Europe — the ratio of futures to cash has gone from an average of about three-fourth to one while this de-risking is going on.

The market is showing a wait-and-see attitude. A lot of people are away on holidays. And then there will be reassessing, especially on what is happening and what its implications are of whatever the Fed and the other central banks have done over that intervening period.

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