Friday, January 5, 2018

Global Markets in Twenty Seventeen

2017 began with Trump’s inaugural speech after he took over The Oval Office in January. It was surreal and scary how serious he was about his radical foreign policy. There were protests and demand for impeachment at the start of the year. But like most things in life, it died down and our man continues to reign.  A bevy of changes to the tax code at the individual, corporate and international level came into effect at the start of 2018.  Large companies are getting a big cut to the corporate tax rates – down to 21% from 35%. This may convert itself into heavy perks and financial benefits to employees. Better consumer sentiment and more consumer spending? Making America great again?

FED kept it slow and easy with a 75 basis points increase over 3 rate hikes as FOMC continued to be wary of low inflation.  While the unemployment rate stayed low, wages remained at a decent level and growth surprised on the upside, it maybe a year before aggressive hikes happened. Change of Guard at the Federal Reserve may not mean change of stance.  But I would wait and watch.

Euro Zone 
surprised positively. Macron won the French election giving us hope that the world is not moving to far right in a hurry; his pro-Euro and pro-immigrant stance help heal deep wounds post Brexit and Trump’s protectionism. Chancellor Angela Merkel won (albeit precariously) the 4th term in German elections; however here, hard right AfD managed to enter parliament.

ECB continues its asset purchase, to a lesser extent though and said in no uncertain terms that it would continue its accommodative stance for as long as needed. This could mean all of 2018, though the economic indicators including growth - are starting to look better.

Brexit is being the single source of pain for the sluggishness in the UK economy as it stifles policy advances.  The entire nation is in a limbo as the policy makers are distracted with goings-on in Brussels (which so far, is pretty much nil). Amidst this Brexit ennui, there are still hopes that Brexit could be reversed in 2018. Realistically, what looks likely is a soft Brexit that too in a last minute agreement (March 2019) as EU continues to play hardball.

In Communist Party Congress's 5 yearly summit, Xi Jinping has consolidated his control over the machinery of the Chinese government. The Party congress approved the amendment of the official Communist Party Constitution to include “Xi Jinping Thought of Socialism with Chinese Characteristics in the New Era” which is his vision for China’s future. With this, Xi joins revered party legend Mao Zedong to have their official thought enshrined in the Party’s Constitution while still in office.

Global Equities
Global growth, lax monetary policy across developed nations, new tax legislation, low volatility (one important indicator is the CBOE volatility index, known as Wall Street’s fear gauge - fell to a record low) coupled with investor’s complacency (or is it irrational exuberance? We miss you Mr. Greenspan) have helped equities soar across the globe. One research shows, of the 73 bourses tracked globally all but nine have recorded gains, this year.

Dollar index has had a tough year with hopes of quicker rate hikes fading away. Also the single currency’s strength with improved geopolitical and economic situation and Pound’s recovery added to the woes of greenback. With US inflation likely to be low, market’s expecting another 75 bps cut this year – this may not be the best news for Dollar this year too. For the same reason and with benign interest rates across the globe, equities may have another profitable year.

At home, coming on the heels of demonetization, introduction of GST and botched up implementation threw businesses off track. Strong polarizing views continue as regards the current Government and it will only get more intense as we approach election year.  Rupee, however has been gaining on the back of weak dollar. With the crude where it is, this should help and there hasn’t been much of resistance from RBI in letting Rupee soar. The trend should continue, domestic political surprises not withstanding.

What do we watch for going into 2018?
      1. Geopolitical stress – what with Trump and Kim Jong Un continuing their war of words which has currently reached debating sizes of their nuclear buttons, Fastest finger? Scary!
2. Developments in Brexit discussions – will it get anywhere?
3. General elections in Italy
4. New FED chair Jerome Powell’s tone
5. Bitcoin – this reached dizzying heights both in terms of value and popularity in 2017. What next? Collapse? Better liquidity and depth?
6. Flattening Yield Curve – New normal or a warning sign for an economic slowdown?

Wednesday, August 2, 2017

much ado about almost nothing

Bi-monthly credit policy by RBI is just over.  A 25 bps repo rate cut, in line with expectation, no change in stance which is a disappointment for the market (read equity market) participants and barely any mention of strong rupee. Verdict out.

There have been so many factors to consider - encouraging inflation numbers but the vegetable prices were rotting the basket. Internal consumption and capex needed a push making a case for a deeper cut while most other central banks are talking of going north. If Rupee strength warranted lower interest rate (to help exporters), nothing much could be done about Dollar weakness in global scenario. Add to it the impact of GST, hike in HRA, farm loan waiver, monsoon, Current Account Deficit and global financial markets. There is a whole big maze out there.

Is there a black box that takes into consideration all the factors and pushes out a recommendation after complex computation? or do they put all the factors in a jar, give it a good shake and do a lucky draw? Do MPC members give an explanation as to why do they think 25 is better than a 50 or zero?

On a serious note, RBI decides what it decides with the aid of it's think tanks and ear to the ground. They have cut 25 bps and said that they maintain neutral policy stance with focus on inflation. No doves and no hawks. Slam, clank, done!

Who were waiting with bird feed in their palms to feed the doves?

Banks - who hardly ever pass on the benefit to those who will contribute to consumption and growth

Equity market (players) - sentiment sentiment sentiment! Low interest rate is good for corporates and consumers and that "sentiment" is good for index. AND healthy index is good for my investment portfolio.  We need to see a bit of euphoria - here and now! The actual impact on corporate profits and real economy - Let that wait, please! For now, we are busy counting our chickens before they are hatched.

Sometimes what we (market) expect is a dose of steroid. All that our economy maybe suffering is a common cold.
"You want steroid to be administered, why?"
"I want the patient to sing and dance in tomorrow's party."
"Ok, but I am the doctor here" said RBI.

Thursday, July 20, 2017

Tamper, Temper, Taper - Tantrums?

Subprime crisis, Lehman Brothers, sub-zero interest climate, QE – we will soon be celebrating 10th anniversary of this historical financial fiasco.  In the last decade or so, market has been flushed with money; all those papers printed mainly by major central banks found their way largely into equities. To get a perspective, currently MSCI’s broadest index of Asia Pacific Shares (outside Japan) is nearly at a 9.5 years high. Don’t you personally feel richer in the last 10 years?

Years of low interest and QE, let’s assume, helped the market survive mother of all crisis (I didn’t say grandmother doesn’t exist). Central Banks pumped unimaginable sums into markets and kept all the too-big-to-fail giants breathing.  I am not questioning this approach, as I have no better alternative to suggest; cant help reminding myself though, survival of the fittest is only for the jungle and not for civilised societies.

QE made risky assets attractive, carry currencies the flavour of the season and generally the world felt like Jane Austen’s society. Then the word “taper” entered the financial dictionary thanks to the then FED Chair Ben Bernanke. Whatever else they do or don’t, Fed Chairs say potent words that move the market and are etched in financial history.  Alan Greenspan’s Irrational Exuberance (to describe red hot stock markets) is case in point too.  I am digressing here! So after Bernanke pronounced possibilities of “taper”ing in May 2015, markets went on a tailspin.  The new buzzword/phenomenon/fear caught on and drove markets crazy.  Around this time, Dollar index was at 84 and Euro at 1.29.

Financial markets in the US have since been off ventilator and out of the ICU, though the effect of strong drugs is yet to wear off. QE stopped, interest rates northbound, lo and behold markets adjusted to a new normal. Reasons to rejoice shifted from easy money to strong economy (relatively speaking).  Before the Brexit shock hit the financial markets Dollar index moved up to 96 and Euro down to 1.11. Post Brexit and the all drama associated with it AND FOMC staying on course on rate hike - Dollar index climbed comfortably to 102 while the Euro got dumped touching close to 1.04.

Now the Taper Tantrum begins again but in another region.  ECB has been at it and the Euro is on a roll.  Is the single currency also secretly rejoicing the mess that Britons have landed themselves into?  Is there more upside to this strange animal as ECB tapers QE?  What happens to the pair EUR/USD if FED is on track hiking rates and ECB continues to taper? Which of the two will play out stronger? If you are looking to find answers here, you may want to stop reading now.

Few months ago, I was watching surfers at Gold Coast.  They swim in, catch on to a wave, ride it, reach the shore, swim again and repeat.  They don’t / can’t ride every wave that they catch on but they take that in their stride.  It is the most calming sight and got me reflecting. Market operators (read markets, collectively) are like surfers. Some are seasoned and many novices (and some just philosophize).  We may discuss the waves and techniques till cows come home, but the key is in riding the current wave.  That is all there is to it. And most of us reach the shore, don’t we?

Enjoy the ride!