One of the things to watch out for in the weeks ahead is whether equities can sustain higher US rates or not, Vivek Rajpal , Asia interest rates strategist, Executive Director, Nomura, tells ET Now.
The knee-jerk reaction of the Indian stock markets to the global rout appears to be weighing on the rupee.
Absolutely. But not only rupee, all the Asian currencies are under pressure and there was risk-off session overnight which markets are responding to.
It is still unclear where this global rout is going to go. The Dow future is already indicating another down day. Is it just a matter of time before we see rupee reach the dreaded 80 levels?
Currency has been under pressure for some time and it is just not India but a lot of current account deficit nations are facing pressure in the forex markets. It is difficult to see what levels we will reach but there is always an equilibrium that comes along. If a significant risk-off happens and oil falls and US rates fall, then that may provide some relief because despite higher equity markets, Indian FX markets and Indian rates markets were under pressure. We have to see when we reach a new equilibrium. For the time being, the risk aversion dynamics will continue.
We have had some fresh comments coming in from President Trump saying that the Fed is making a mistake with hiking rates too fast. Could there be a concern that Trump does not believe that intrinsically the US economy is as strong as the latest numbers show?
Absolutely. I think one of the things to watch out for in the weeks ahead is whether equities can sustain higher US rates or not. US rates can continue to rise as far as financial conditions remain easier and that is really a function of whether interest rates are becoming important in terms of growth expectations or not. Until now, we have seen a broad rise in US rates and we have seen this along with equities going higher. But yesterday was an interesting session when equities fell and then in response to that even US rates fell.
We have to see whether financial conditions tighten or not. It is generally very difficult for US markets to rise if financial conditions become might tighter. Markets need easier financial conditions if one really believes that US longer end rates will continue to go higher. The Fed has been indicating for some time that they will remain on a gradual path of hiking rates and the market is fully priced in for December and even for 2019 rate hikes.
I do not think there is much of an issue in there, probably a lot is needed to take Fed away from that path of hiking but for markets what really matters is how the longer end of the US 10-year rates behave. One would probably need easier financial conditions before we see a continuous rise in US 10-year rates from here on.