fed: Get ready to live with a lot of volatility and little gain: Maneesh Dangi

Get ready to live with a lot of volatility and little gain: Maneesh Dangi

27 Jan , 2022 By : monika singh

The new mandate and the new pivot of the Fed is to tame inflation and in some sense even if it takes substantial slowing of the economy. That setup is good for the dollar and bad for bonds and equities. Of course, it is bad for emerging market currencies,” says Maneesh Dangi, Macro Investor & Advisor.

The last time we talked, the bond markets were still not reacting to inflation. Finally, we have seen the action on the bond market. How are you reading this? A month ago you had said you were going underweight on equities.
he setup for Indian equity remains a no-win one and not just the bond market and financial condition related to it but also the oil prices are up. So on either side of the aisle, a weakish setup exists for us. But to take a step back here, let’s see what happened last night.
The Fed’s move basically suggests that it wants to use tightening of financial conditions to impress both upon the economy and inflation. It actively wants to perhaps even slow the economy through tighter financial conditions because before the press statement was put out, the market was actually rejoicing on the Fed’s move because it was on expected lines of March hike taper and then eventually some form of tightening.
But then, when the press asked about the tailrisk, Fed Chairman Jerome Powell said more frequent rate hikes and more than four rate hikes were not off the table. That actually spooked the market. So in the set up we have now, it is very likely that the violent move of the bond market would continue even in the set up when otherwise economic data is beginning to slow.
The new mandate and the new pivot of the Fed is to tame inflation and in some sense even if it takes substantial slowing of the economy. That setup is good for the dollar and bad for bonds and equities. Of course, it is bad for emerging market currencies and that is the narrative I anticipated over the last couple of months and is starting to play out.
What is going to happen to the construct of the Indian market? Can it continue to outperform in 2022 when there is a lot of chatter about PE compression?
While we like to think of the Indian market as some isolated place which is driven by purely Indian earnings and Indian rates, the truth is it is simply a part of the big sort of global machine and it is very very difficult to imagine a setup in which US markets are correcting or other global markets are correcting and India is still rallying and putting on more weight.

My base case continues. The market has to sort out the divergence that it has in terms of its view versus a view that Fed is putting forward now and until the market is ready for a world where we will see a reversal of QE and instead of a set up where every time asset market sold off, the Fed turned more benign, we will have a setup in which the Fed would not bother about stock markets at least for now.

That template applies even for India. The dollar will appreciate and US treasuries selloff will continue at least for the shorter end. We saw the two-year treasury actually move up from 102-103 to 118. Now markets are pretty much pricing 4-5 rate hikes or even more in the next 12 months. In that setup, Indian central bank will have to act. It has to lean and in terms of tightening though our growth narrative is not as strong as that of the US and our inflation is not as bad as the US because in emerging market, we do not have too many choices.

I am afraid that purely the macro setup is not yet good and we will continue to live with a lot of volatility without any remarkable gains in the asset market.