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'No bad news in US Fed chief's speech'

July 20, 2006 19:12 IST

Federal Reserve chairman Ben Bernanke touched off the biggest one-day rally in US stocks this month by hinting that the Central Bank is almost done with raising interest rates. The indices had their biggest rise since June 29.

Michael Metz, Chief Investment Strategist at Oppenhiemer & Co, believes that there is no bad news in Bernanke's speech and that the Fed is unlikely to move any further on interest rates.

Metz says that the Fed is almost complacent about the outlook.

However, he is not too optimistic about emerging markets, he does not see much foreign flows entering these markets. He believes FII flows will concentrate on lower risk markets.

Excerpts from CNBC-TV18's exclusive interview with Michael Metz:

What did you read into what Ben Bernanke said and do you think the markets reaction is justified?

I think one has to look at what preceded it, I think a lot of people have been very uneasy, very nervous, anxious and they have sold in anticipation of various developments, including Bernanke's speech. So they were really positioned for bad news, but there was really no bad news in the speech.

Actually, it was slightly constructive in the sense that I think the Fed realises that it has no control over oil prices, which is a major influence on inflation and the Fed seems to indicate that there is no real upward pressure on unit labour costs because productivity is improving in line with the rising wages. And if there really has to be a slowdown the economy, all these inflationary pressures that we seem to feel now are a lagging indicator and they will be coming down soon.

Basically the Fed was almost

complacent about the outlook and this was a surprise.

Is there any clarity though on what happens in August or do traders and investors walk in just as uncertain about that hike?

My judgment is that over the next few weeks' people will realise that it is hardly unlikely that there will be another hike. If one thinks about the increase in interest rates does nothing to curtail either inflation or commodity prices but what it does is exacerbate the housing situation, which is already very fragile.

My judgment is that the Fed will not move any further. I think the real problem to emerge over the coming months is that the slowdown will be more dramatic than is generally expected.

But here again there was some good news that the Fed apparently is projecting a 3% growth next year, no increase in inflation and so apparently they are very optimistic about their outlook, I am not frankly.

What happens to emerging market flows now, in the light of what the Fed may or may not do and what may or may not happen in the US finally but given what BoJ did over a few weeks back and what the Fed is saying right now, what do you see as the kind of flow situation over the next 3-6 months in emerging markets?

I am not as optimistic as far as that is concerned, I think the flows will still concentrating on lower risk areas of the equity market and that will benefit most big capitalisation stocks in Europe and also the US.

I don't think there is going to be a consistent inflow of money back into emerging markets at this stage.

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