That the RBI is not yet done with liquidity tightening was well anticipated. The first monetary policy for financial year 2011-12 was therefore expected to make borrowing costs dearer. But another 0.5% hike in repo and reverse repo rates today do not just make the rate steep. They feature India amongst the emerging economies where leverage is a huge deterrent for companies and individuals. This certainly is not all bad news in a scenario where excess debt has caused economies to go bankrupt. Or has led to even the likes of the US to consider a debt default. However, the prohibitive rates will certainly ensure that the RBI's downward revisions of GDP and credit growth become a reality. In fact we will not be surprised if more such downward revisions follow.
The latest hikes put the repo and reverse repo rates at 8% and 9% respectively. This is while the 10 year GSec yield is at 8.2% and 5 year AAA bond yield is 9.6%. Thus, the gap between short and long term borrowing rates has narrowed considerably over the past 2 years.
There is no doubt in anyone's mind that the Eurozone is indeed facing some very serious challenges. And it is doing whatever it can to tide over the same. One particular action that has caused quite a bit of stir has to do with ratings agencies. Apparently, their independence has been restricted by some of the European policymakers. And quite expectedly, it has not gone down well with ratings agencies. In an editorial in FT, Deven Sharma, the President of S&P, one of the world's premier ratings agencies, has argued that such a step is likely to prove counterproductive. To criticise ratings firms for creating or deepening Eurozone's problems is to confuse symptoms with causes, he is believed to have said. A better approach, according to him, would be to avoid making ratings the sole criteria for policy decisions. While we are no fans of ratings agencies, we believe Mr Sharma could well be right here. Problems of Eurozone are of their own making. And to blame ratings age ncies for the same is indeed taking it a bit too far. Trusting ratings agencies blindly is not the solution either as the subprime crisis has shown. At best, it can be considered as an opinion and the investors would be well advised to do their own independent research.
Copper prices witnessed happy times till last year. This was on the back of the huge demand from China. However, in recent times, prices have corrected sharply. This was again thanks to China as fears of slowdown started to hit the prices of most commodities. Considering the fact that China consumes nearly 40% of the global copper, it is little wonder that the prices of the red metal are determined by the fortunes of the country. But one wonders as to where copper is headed. Considering the fact that copper is mostly used in the construction industry, it appears that its prices would continue to trend upwards. The reason for this is that despite the slowdown in China, construction activity in the country is still quite high. Though it has slowed down in bigger cities, however, it still continues to be strong in the smaller provinces. In fact China has largely been drawing down on its existing copper inventories. This is the reason why the demand has not reflected in th e prices. But once the inventory is finished, it would come back to the markets to buy more. And that would send the prices of the metal back up.
Traders appear to be optimistic on oil prices. The biggest bet now stands at US$ 120 per barrel for oil. This is on premise that growth in emerging markets will outweigh the debt crisis in Europe, slowdown in the US and extra supplies from Saudi Arabia. The IEA has gone back (retreated) on its promise to release more oil from its stockpiles. And that has been well captured by option markets that now indicate higher chances of rise in oil prices. While we believe the price to remain high in the near term, the level of US$120 a barrel seems stretched. We should not forget that the triggers which pulled down oil price prospects in April are not off yet. Infact, they are only gaining more momentum. The US seems to be at the brink of a financial calamity on account of debt limits with the decision makers still a long way from any deal and deadline just a week away. The Eurozone debt concerns continue to fester. And the main point on which they are placing their bullish bets, the much expected overriding growth in Asian economy, remains shadowed by policies to curb inflation. Last but not the least, any surge in oil prices will pull down the global economic growth feeding a negative for oil price itself.
Time seems to be running out for the US as the Congress still has not reached common grounds on the issue of raising the debt ceiling. As per President Obama, a default by US would be catastrophic and could push the country into a second depression. However, the American corporations don't seem to be doing so bad. As per Wall Street Journal, earning at companies in the S&P 500 are the highest they have been in the last four years. All but a quarter of the companies listed on the index have outperformed analysts' predictions. While this is great news for investors, it is not so for American job seekers. This is because the gains which these corporates have shown come mainly from international markets. Naturally, American corporates would look to expand their operations in these markets, backed by hiring of overseas workers.
Manufacturing had been the driving force behind America's Industrial revolution. But with the shifting of manufacturing out of the country, new jobs will not be created. What is more, President Obama's Quantitative Easing (QE) programmes, have certainly had no impact whatsoever in reducing the persistently high unemployment rate in the country.
Markets are trading weak post announcement of 50 basis points rate hike by RBI today. At the time of writing, the benchmark BSE Sensex was down by 282 points (1.5%). All sectoral indices were trading in the red led by realty and banking stocks. The Asian markets are all trading firm with Taiwan and Hong Kong leading the pack of gainers.
The latest hikes put the repo and reverse repo rates at 8% and 9% respectively. This is while the 10 year GSec yield is at 8.2% and 5 year AAA bond yield is 9.6%. Thus, the gap between short and long term borrowing rates has narrowed considerably over the past 2 years.
There is no doubt in anyone's mind that the Eurozone is indeed facing some very serious challenges. And it is doing whatever it can to tide over the same. One particular action that has caused quite a bit of stir has to do with ratings agencies. Apparently, their independence has been restricted by some of the European policymakers. And quite expectedly, it has not gone down well with ratings agencies. In an editorial in FT, Deven Sharma, the President of S&P, one of the world's premier ratings agencies, has argued that such a step is likely to prove counterproductive. To criticise ratings firms for creating or deepening Eurozone's problems is to confuse symptoms with causes, he is believed to have said. A better approach, according to him, would be to avoid making ratings the sole criteria for policy decisions. While we are no fans of ratings agencies, we believe Mr Sharma could well be right here. Problems of Eurozone are of their own making. And to blame ratings age ncies for the same is indeed taking it a bit too far. Trusting ratings agencies blindly is not the solution either as the subprime crisis has shown. At best, it can be considered as an opinion and the investors would be well advised to do their own independent research.
Copper prices witnessed happy times till last year. This was on the back of the huge demand from China. However, in recent times, prices have corrected sharply. This was again thanks to China as fears of slowdown started to hit the prices of most commodities. Considering the fact that China consumes nearly 40% of the global copper, it is little wonder that the prices of the red metal are determined by the fortunes of the country. But one wonders as to where copper is headed. Considering the fact that copper is mostly used in the construction industry, it appears that its prices would continue to trend upwards. The reason for this is that despite the slowdown in China, construction activity in the country is still quite high. Though it has slowed down in bigger cities, however, it still continues to be strong in the smaller provinces. In fact China has largely been drawing down on its existing copper inventories. This is the reason why the demand has not reflected in th e prices. But once the inventory is finished, it would come back to the markets to buy more. And that would send the prices of the metal back up.
Traders appear to be optimistic on oil prices. The biggest bet now stands at US$ 120 per barrel for oil. This is on premise that growth in emerging markets will outweigh the debt crisis in Europe, slowdown in the US and extra supplies from Saudi Arabia. The IEA has gone back (retreated) on its promise to release more oil from its stockpiles. And that has been well captured by option markets that now indicate higher chances of rise in oil prices. While we believe the price to remain high in the near term, the level of US$120 a barrel seems stretched. We should not forget that the triggers which pulled down oil price prospects in April are not off yet. Infact, they are only gaining more momentum. The US seems to be at the brink of a financial calamity on account of debt limits with the decision makers still a long way from any deal and deadline just a week away. The Eurozone debt concerns continue to fester. And the main point on which they are placing their bullish bets, the much expected overriding growth in Asian economy, remains shadowed by policies to curb inflation. Last but not the least, any surge in oil prices will pull down the global economic growth feeding a negative for oil price itself.
Time seems to be running out for the US as the Congress still has not reached common grounds on the issue of raising the debt ceiling. As per President Obama, a default by US would be catastrophic and could push the country into a second depression. However, the American corporations don't seem to be doing so bad. As per Wall Street Journal, earning at companies in the S&P 500 are the highest they have been in the last four years. All but a quarter of the companies listed on the index have outperformed analysts' predictions. While this is great news for investors, it is not so for American job seekers. This is because the gains which these corporates have shown come mainly from international markets. Naturally, American corporates would look to expand their operations in these markets, backed by hiring of overseas workers.
Manufacturing had been the driving force behind America's Industrial revolution. But with the shifting of manufacturing out of the country, new jobs will not be created. What is more, President Obama's Quantitative Easing (QE) programmes, have certainly had no impact whatsoever in reducing the persistently high unemployment rate in the country.
Markets are trading weak post announcement of 50 basis points rate hike by RBI today. At the time of writing, the benchmark BSE Sensex was down by 282 points (1.5%). All sectoral indices were trading in the red led by realty and banking stocks. The Asian markets are all trading firm with Taiwan and Hong Kong leading the pack of gainers.
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