Wednesday, February 22, 2012

News and views

Euro zone finance ministers agreed on a much awaited Euro 130 billion bailout package for Greece to avoid defaults.  A major bond repayment is due in March; while this rescue package is facesaving for Greece (albeit temporarily), there are lingering doubts about Greece's ability to recover and more importantly avoid default in the future. EU had managed to stall immediate risk of contagion by forcing Greece to commit to unpopular austerity measures and pushing bond holders to take big losses.  It's hard to see how Greece would implement austerity measures / achieve new fiscal targets and ensure growth or in the absence of the latter how would the former be possible.  

Last week, BOJ announced sizeable quantitative easing to stem deflation.  BOJ's asset purchasing program is expanded by a further Yen 10 trillion where they will buy more long term Government bonds.  In a first time move, BOJ also set a numerical target for inflation.  This move coupled with the fact that  the market is more willing to wear a "risk on" hat (post Greek deal), Yen has lost considerable steam in the last week or so.

There is plenty of support to risk appetite.  Greek bailout has helped and the US economic data continues to be better than expected.  FED has committed to keep the rates near zero for a considerably long time. This increased risk appetite is evident; yesterday dow moved above 13k mark for the first time since May 2008. 

In China, PMI (manufacturing activity) remains under 50 (contraction territory).  February data at 49.7 is better than 48.8 in January however it is been in a contraction zone for the fourth month in a row.  This would continue to keep the pressure on PBoC to keep the rates soft / ensure liquidity for a considerably long time.  

PMEAC (PM's economic advisory council) 's chairman C Rangarajan  said "we might be able to achieve 8% growth (12-13)on our esteem and if the world environment is favorable, we will be able to achieve higher growth rate".  Also according to him, excessive appreciation of rupee is not good. I wonder what is the point of reference for comparison - 54, 49 or 45?

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