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Robert Parker, Vice Chairman, Credit Suisse Asset Management, said the markets will recover by year-end, but will be volatile in May-June. He told CNBC-TV18, "The markets went from extremely oversold to overbought last week. Oil has crossed USD 120 per barrel, which has an inverse correlation with markets. Global Central Banks have indicated that more rate cuts may not help."

According to Parker, problems in the US financial markets are not over. "Growth in the US was negative, if we discount 0.6% inventory growth." He feels crude is also a worry.

The strengthening rupee was causing some damage to the Indian economy, he added.

Excerpts from CNBC-TV18's exclusive interview with Robert Parker:

Q: What’s your feeling, its not just been an India specific rally, its been a pretty much a strong global pullback, do you think the global markets now need to ease off a bit in the term?

Parker: If we go back to one week ago, I would say there are 3 danger points that we identified one week ago. First of all the global equity market after the rally of the 3rd week of March until a week ago, clearly technically the markets have gone from extremely oversold during mid-March to a more overbought position a week ago. The second factor has been the uptrend in commodity prices and notably the continued uptrend in the oil prices which earlier today has been trying to test USD 125/bbl and I would highlight the end of the current market, there is a near perfect inverse co-relation between the oil price and the global equity markets. The third factor which has not been much talked about but I do think over the past few weeks we have had a clear signal from the world’s Central Banks, notably from the European Central Bank and the Federal Reserve that the markets can not rely on further cuts in interest rates and associated with that of course is the co-relation with the bond market yields and the equity markets.

From late March until about a week ago we have had quite a large back up in the bond market yields particularly the back up in the 2 year treasury yields and that relationship meant that the equity markets in recent days have become vulnerable.

Q: Two issues if you look forward a few weeks from now firstly how would you map the Dow which has had a great rally and is just eased off a little bit in the last few days and the dollar, which is in the midst of a seeming rebound?

Parker: I think we are going to see a big divergence in market movements over the balance of May and going into early June and the rest of the year. I can put forward an analysis saying that the market will recover in the second half of the year.

However during May and June I think the market volatility will increase and I think that risk factors which we were talking about earlier for equity market and the dollar will weigh on those markets negatively. In terms of the dollar, we have obviously seen up until two days ago a stronger dollar, the euro against the dollar has pulled back from around 1.6, at one stage we were close to 1.53 and likewise on the Yen if we go back a month, the Yen was trading at 96-98 on the US dollar and then we had a pullback to close to 106.

In terms of trading today on the Foreign Exchange markets the bias on the dollar is somewhat weak and I think that will continue. Over the next month the Yen will test 100 again against the US dollar, it will probably fail that level but certainly we at these levels have gone short on the dollar again. On the dollar-euro I think we could move back to probably 1.57-1.58.

On the equity markets and notably the American equity market, I think the key factor to think about is that after 0.6% annualized GDP growth in the first quarter that was largely due to inventory accumulation, if you strip that out then the growth in America was negative in the first quarter. In the second quarter there is a high probability that the American economy will contract. I think we could have further sub prime problems being announced not from the banks but from the insurance companies.

So a weak economic environment, oil prices short-term staying high until we get a correction down on the oil prices and I think the unwinding of what was last week and in the beginning of this week somewhat overbought equity market. A month ago we were positive on markets but I’m afraid that we are the opposite now taking a one month to 6 weeks time horizon.

Q: From a global investor’s perspective are people getting a little skittish about Indian macros inflation at more than 7.5%, the rupee losses 4% suddenly versus the dollar in just about a week’s time, the deficit probably seeming to expand quite sharply because of oil prices not being passed down etc. Are global investors getting a bit edgy on the macro’s here?

Parkar: My clear answer to that is no. What we have seen in the last week on the Foreign Exchange markets should not be looked at necessarily in an Indian context but what is happening to the emerging market currency is generally. Coming back to my earlier point about the change in Central Bank policies over the last few weeks, with now Central banks largely on hold in terms of the interest rate action that has been dollar supportive and where we have had big hot money capital flows not just in the last month but over the last 6 months obviously has been into higher interest rate emerging market currencies.

What we have seen over the past few weeks and this will probably continue in the near-term is large whether its hedge funds or institutional investors, who have been long on the emerging market currencies and they have been taking profits.

I would also like to highlight to other countries one is China, where there is heavy evidence that the strong appreciation in the Chinese Renminbi (RMB) seen over the last year and a half with the move from 8.3 to 7 against the US dollar. I think there is lot of evidence now that we could have a period of 6 months or longer of the Chinese RMB stabilizing between 6.9and 7. Another country which has much more significant current account deficit than India is Turkey; there we have also seen quite heavy selling on the currency. Another one worth mentioning is South Africa, where there is again heavy selling on the currency.

In term of the macro economic impact, let’s not forget the one of the reason that we were quite cautious on the Indian equity market for the last 6 months was the impact of the strength of the Indian rupee. I would argue that if we go back one month, we are reaching a situation where the strength of the Indian rupee was causing some damage to the Indian economy. One has got the balance right between inflation, the strength or weakness of the currency and the current account deficit but I would argue that probably the strength of the currency a month ago was having an adverse impact.

Q: Sum up for us the next 10% move in equities in India and in emerging markets is up or down in your eyes?

Parker: Since the end of June last year, global banks have written off USD 330 billion and we are in the end game for bank write offs, although we may have some problems in the US insurance industry and in terms of capital raising, banks have raised over the past 6 months USD 220 billion. We have gone in the banking system from a situation which was exceptionally fragile at the end of last year and the first quarter of this year, to actually a situation where the bank capitalization is certainly nearly back to adequate levels.

To come back to your question, I don’t think we are going to have a 10% move down over May and early June. I however do think, the Indian and global markets are going to trade to the downside where the downward move is going to be modest and we are going to be forming a base in equity markets as we go into the third quarter. I think an improvement in terms of the commodity price outlook ie. the oil prices down plus an improvement in the US economy as it starts to see a better growth prospects. Then we actually could see in the third quarter much better equity market prospects.

Source: Moneycontrol.com