It is not yet a time to rejoice on the rally that the market is seeing. Experts feel that this is a pure relief rally and will lose steam soon. Global cues too indicate a week economy.
Marc Faber, Editor and Publisher, The Gloom, Boom & Doom Report, is cautious on global markets. In an interview to CNBC-TV18, he warned that markets are likely to see a rough period in Sep-Oct.
Weakening of commodities prices reflects global slowdown and Faber said that it is poised for further downfall. The only relief, however, according to him, is that oil prices is unlikely to collapse. “Brent can correct to USD 80-85/bbl,” he suggested.
Below is the transcript of his interview with CNBC-TV18's Udayan Mukherjee. Also watch the accompanying video.
Q: We have seen some strength in the global markets despite weak economic data over the last fortnight from the US, what would you put that down to?
A: Basically there is apprehension about holding cash, particular in money market funds. So, some money is moving out of money market funds into treasury bills (T-Bills), treasury notes (T-Notes), treasury bonds (T-Bonds), and also in equities. Secondly, the market became very oversold about a week ago on a near-term basis. On a longer-term basis, the market is not oversold. But near-term the market was very oversold and sentiment had turned rather negative. So, a rebound is only natural.
Q: Do you expect the rebound to have legs going into July? Could it be a more substantial rebound?
A: Usually what happens in the market, we have to seasonal strength in January then weakness in February, then strength in March-April and then weakness in May-June and then again a summer rally in July until early August. So, we are moving into seasonally strong period. But unlike many strategists, I don’t think we are going to make a new high. I think the S&P or the overall market in the US will close 2011 at about this level or lower not higher as every strategist is predicting. I think we have seen the highs for this year, let us put it this way.
Q: In this pullback, how much would you give the S&P?
A: I think we can rally to around 1,330 on the S&P now, but not make a new high above the 1,370 highs, which we saw in May. And then, in my view, we would be going down to maybe 1,150 on the S&P.
Q: Do you think after the early part of August once again we run into rough weather leading up to the September-October period?
A: Yes. I think the second half of August, September-October will be rough months.
Q: How do you expect the dollar to move in the near-term then, if that is your prognosis for equities?
A: I think the dollar has begun to strengthen somewhat. The strength may continue. But it continued to be weak against the Swiss Franc. The Swiss Franc is essentially the only kind of very strong currency at the present time. Overall, I would expect the dollar to strength, particularly against the euro.
Q: In India, the market has bounced back because crude corrected last week or early this week very sharply to USD 102 on the Brent, do you expect crude to correct more substantially? Is it breaking down in your eyes?
A: I think all commodities are weakening at the present time, which essentially reflect a significant slow down in the global economy. We will weaken further, in my opinion, until about the end of December. I do not think that oil will collapse. I think we may go down to around USD 80-85 per barrel or so and then have further strengthening in the years ahead.
Q: USD 80-85 on Brent or on WTI?
A: On Brent.
Q: What about the Greece situation? Do you think the markets have priced it in, the upmove of the last one week or do you expect a post Greek resolution rally in the western markets?
A: I think the market in the last two days has already rallied in anticipation of a bailout. The problem is not really Greece or the size of Greece, but it is the contagion that could arise from a crisis in Greece. The problem is also that US mutual money market funds have about an exposure of about USD 800 billion to European Banks. Admittedly mostly to high quality banks like German Banks, French banks. But the point is the system collapses, if the bailout does not take place. So, I think the bailout will come and on the bailout news the market will essentially start to retrace lower again or at least it has been discounted.
Q: How are emerging market equities looking to you? Given your view on the western markets as you detailed it, how do emerging markets equities look?
A: Emerging market equities don’t look good technically. I think they may underperform the US for a while.
Q: Does that include India?
A: Yes.
Q: How much downside do you seein the Indian markets from here?
A: I think the market will head lower along with other markets in the world. As I said we can have a rally into July, August and then a further weakness in the fall. And then probably bottom-out somewhere in late October-November.
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