Where are you when the Fed hikes rates?

With a 75 percent chance of a rate hike by the Fed, let us have a look at the environment and the probable implications:

• ·         Oil glut  (plus for emerging economies who are importers); Short sell?
• ·         Gold Fall (should positively impact on current account of gold importers like China and India) Short Sell? 
• ·         Commodity price falls should reduce input costs of emerging economies but harm resource based economies
• ·         Emerging markets (already deserted by the FIIs)  will fall a trifling more as the last of the doubters leave for New York.
• ·         Emerging markets' corporates could have their borrowing costs high if they have resorted to dollar funding. The appreciation in the dollar could see corporates struggling to pay back.
• ·         Chinese growth rate may continue to be under pressure in a inevitable deceleration accentuated by a lack of transparency.   
• ·         India's growth rate will be under pressure from its combat loving and 'bickering petty' politicians who cannot have any consensus on reforms which need legislative sanction;
• ·         India's financial sector will start feeling the impact of latent non - performing assets which are in filibustering pipeline-  stressed assets, restructured assets. Its regulators are slow and far behind a runaway sector.
• ·         Japan may be attempting to return to growth but the tendency to revert to recession is so strong that the Japanese industry has to hollow out to other emerging economies such as India. ( bullet train diplomacy)
• ·         Natural resource endowed countries from Saudi Arabia to Australia will have to borrow at higher costs abroad. Commodity prices will look further south. 

So it looks good to buy safely in to advanced countries' assets  and the dollar. May be the Japanese Yen and Great British Pound may seem to be a parking slot for euro sceptics.  

This blog recommends no investment. All views expressed here are without any risk or responsibility. 

USA has a winning Strategy and no competitors....

"What is most important  is not what happens but what it means"...

Of late,  USA displays  rare political acumen; its foreign policy strategies are so sagacious and so quietly successful. It has tactically withdrawn from battle fronts in Asia. It has refused to be drawn back despite hidden and direct invitations. It has extended a hand of friendship to Cuba. It is mending fences with a broken Venezuela and its Lat Am neighbours.  It makes the right noises on Africa but does not overtly meddle any more. It lets Israel blast its policies in its Congress even as it delays signing a treaty with Iran. In Asia, while recognizing China as its  major trade partner, it is  laying out a network of potential allies  ranging from India to Japan in an attempt to contain Chinese growth ambitions. USA geo-political strategy manages contradictions so well. 

Much as the US   strategists might like (if not love) it, the middle east is split through  the centre in schism. The division between Saudi Arabia and Iran as respective leaders has vertically split the Middle East.  Heard disbeliefs are severe, unheard discontent elements are several. The post Feb -2011 events have disturbed the very fabric of the Arab society. Democracy  is seeking an agonizing birth.  The polity seems caught between 2 worlds, one refusing to die and the other not bold enough to be born.  Egypt is a classic example of dilapidated nations, fast sinking to be of the status of Jordan, a  dignified dependent on others. It is a self destructive path so often seen previously in Lebanon. As the USA withdraws tactfully in Afghanistan and Asia, there is a rush of power to fill in that vacuum. The power brokers will see destructive engagement.

Economically, Europe is split asunder between the haves and have-nots. Greece imbroglio  has shown off the lack of leadership skills in Germany, and the Germans are USA's economic major competitor at all times. Any peace brokered through the acceptance of Greek proposal would be ephemeral.  It would be a humiliated, restive and helpless Greece that accepts austerity. The mental perspective in an average Greek mind is that Greece has been pushed into a blind alley by Germany. That is not a perspective that would help the integration of / fusion of Europe.  The other peripheral countries have already indicated a resurgence of nationalism. Britain, which has more in cyclical patterns in common with USA and which sulks at Teutonic dominance, would wait to move away from a weakened Europe, with a tacit support from across Atlantic. Bid European Banks too seem to do negatively , thanks to its non adherence to norms of US regulators.

Any semblance of a victory for Germany would strengthen the euro and that should help USA exports.  ( "In particular, the higher foreign exchange value of the dollar that I mentioned, as well as weak growth in some foreign economies, has restrained the demand for U.S. exports." - Janet Yellen  at the City Club of Cleveland, Cleveland, Ohio, July 10, 2015 Recent Developments and the Outlook for the Economy")

Oil is in a situation of glut. So the inventory levels take USA  to a situation of  comfort zone. Even though it might speak  of falling investment in the petroleum sector, it has benefited the USA  customer and left him a wealth effect as real incomes go up. There will be consequential spending in USA which should buoy up the economy further. The wealth effect on the Gulf countries will reduce the accelerated growth of city states like Dubai. Football issues and labour issues have dogged the prosperous Qatar. USA just has to keep it all simmering. With Russians licking economic wounds, and economic bubble woes holding back China, USA  does not have to worry so much. It is far too ahead in the lead of economic strategy.

China, the Asian giant is in a state of limbo with its asset prices falling. The wealth effect of a $3 trillion loss incurring Chinese economy is stupendous. There is more to it than meets the eye in the Chinese policemen enquiring as to who all short sold. Chinese consumers will feel less prosperous after stock market wounds and refrain from buying. It will add to social disquiet too. Internationally, the image is  of a state intervening, fickle tock market in China. Chinese have also to encounter its unstructured capital market products which are patently over-leveraged.   

The Japanese are still recovering from the local  economic harakiri inducing inertia , nay stupor triggered by a recession older than decades. Neither monetary policy nor fiscal policy seems to revive confidence in a fatalistic society.

India , despite good leadership, is held back by a splintered polity. Reforms are delayed by a difficult opposition.  Thus the growth rate of 7.5 % looks great but the economy's moving further, like its infrastructure, is on slow and often pothole ridden roads.  If only its central bankers could talk less and concentrate on banking sector's  non performing and stressed assets, and only if there was more professionalism among its civil servants!

With commodity prices down, (from copper to coal to gold, it is a shortening scenario) and the tigers struggling, there is nowhere to turn to except the dollar assets. May be the Yen may hold some safe haven status being least problematic among competitors. The Swiss are on to negative interest!

Janet Yellen has  indicated that there is a fair  likelihood of a rate hike. The global markets have long factored this in. With the rate hike quarters pruned to probable last quarter, and with just data supported evidence of growth needed, there will be a bee line for US assets. The rest of the world will see a compensatory sell off as the institutional investors shift to USA. The cost burden of the rate hike will be factored in by US  corporations , which are among the most productive technologically.

USA has, it appears,  for its  strategy 'Carpe noctem': 'Seize the night'

Without any  risk or responsibility.

Japanese Yen to be hot property?

As Japan emerges from the long haul of a recession, there is every likelihood of a safe haven hungry world turning to the Japanese Yen. The fall and fall of the euro has left the market flooding to the US Dollar. With the revival of the Japanese economy seen, the confidence in Japanese assets will be buttressed and this could see a strengthening of the yen following its recognition as an alternative safe haven. The Yen may see upward moves.

USD/JPY at 17.00 JST Average in the month: Tokyo Market
Source of Time Series Data : Bank of Japan.

. Views Expressed without any risk or responsibility. 

Waiting for ECB ...Godot?

Great expectations from the ECB on  QE. The world waits with bated breath for ECB as there are global markets that will be impacted.

• The ECB's Executive Board  has reportedly proposed that the bank should buy 50 billion euros ($58 billion) in bonds per month from March.

·         The ECB has already cut interest rates to record lows

·         It bought private sector assets.

·         It routed billions of euros in cheap loans to banks, in the hope that they would on lend the money to add to the circular flow of funds.

• Now the much delayed  QE, a policy that the U.S. Federal Reserve, Bank of Japan and Bank of England have used to revive growth is to be adapted.
• Euro zone policymakers  want to avoid what happened in Japan - low interest rates-fall in prices- expectations of further falls- deflation- price harakari.
• So ECB wants to avoid a Japanese style price destruction.
• ECB could buy sovereign bonds, and push up prices at home and crowd out some of the portfolio holders by selling European assets so that the euro is weak and not so strong  enough to cause despair to the European exporters.

The French, the Italians and the World want it. But ECB is modelled after BUBA who are obsessed with inflation fighting. In their rule book, nothing is advisable to trigger inflation.

In 2010, the ECB triggered off QE by buying bonds of afflicted countries like  Greece. The BUBA had then disagreed. Greece just deferred its troubles.  The Germans are not prepared for sacrificing for wealth redistribution. There is just no euro bond. Among Sovereign debt only Germany and Luxembourg have top ratings. 

The Canadian  interest rate cut by a quarter point caught markets by surprise - the Canadian dollar went lowest in 6 years to the USD but the Toronto stock market's main index went up 1.8 percent. The Swiss National  Bank's de-pegging and the Danish moves to defend the peg are all adding to the uncertainties of the market. With none except USA doing well and with China faltering, it is quite a tall order to expect ECB to deliver a panacea that it could not deliver all these days. The German influence appears just too strong to let Draghi have his full way. Half-hearted attempts do not satiate a market. 

Book profits. In safe haven flight to quality,  when in doubt, flee to US Dollar, Swiss Franc and Japanese Yen.

From Waiting for Godot by Samuel Beckett

Vladimir:

I thought it was he.

Estragon:

Who?

Vladimir:

Godot.

Estragon:

Pah! The wind in the reeds.

Vladimir:

I could have sworn I heard shouts.

Views expressed here are without any risk or responsibility.