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Fri, 01st July 2016

Anirudh Sethi Report

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Archives of “Analysis” Category

Global stocks recoup $2 Trillion in market value

What goes down must come back up?

That seems like the philosophy across global equity bourses that shed a record $3tn in market value in the two sessions following last Thursday’s Brexit vote, just to recoup $2.1tn over the past three days, according to new data from S&P Dow Jones Indices.

Despite the wild ride over the past week, global stock market value is was down by a relatively modest $353bn to $42.7tn this year, which equates to less than 1 per cent.

Total developed-market market value was down by $544bn in 2016 so far, while emerging market market capitalisation was up by $192bn.

Mexico raises rates by 50bps to 4.25%

Mexico’s central bank has hiked its key lending rate for a second time this year in a bid to support the peso, which has been hard hit by the market turmoil set off by the UK’s shock vote last week to leave the EU.

The muscular move by Banxico to raise rates by 50 basis points to 4.25 per cent comes just days after the peso closed at its weakest level ever against the US dollar

The move is much bigger than the market was expecting with only 5 out of the 26 economists surveyed by Bloomberg predicting a 50bp rise.

In a statement, the central bank said that a “large deterioration” in external conditions – the Brexit vote – could have an adverse effect on inflation.

It said in a statement:

Although the available information still suggests a base scenario for the short and medium term for inflation congruent with the permanent goal of 3 per cent, external conditions have suffered a large deterioration, a situation which could adversely affect the future behaviour of inflation.

With this action, we are seeking to avoid the depreciation of the national currency that we have seen in the past months, and the adjustment of some relative prices, translating into a de-anchoring of inflation expectations in our country,” it added. The bank will remain vigilant, watching the exchange rate and possible pass-through to consumer prices closely, as well as the relative monetary position between the US and Mexico and Mexico’s current account deficit, and said it stood by to take any action, “with all flexibility and whenever conditions dictate.

Overnight US Market :Dow zoomed to close up 235 points.In 4 Sessions up by 867 points

867 pointsThe U.S. stock market kicked off the final day of a turbulent second quarter with big gains for a third straight session, as investors continued to downgrade the fallout of the Brexit vote.

At the 4 p.m. ET close, the S&P 500 stood was up 1.4% higher. The Dow Jones industrial average, which had posted its best back-to-back point gains since last August following the Brexit-driven sell-off Friday and Monday, gained another 235 points, or 1.3%. The Nasdaq composite gained 1.3%.

It was the first time the  Dow pieced together three straight days in a row with triple-digit gains since mid-February. The Dow has gained nearly 790 points the past three sessions.

It was a winning quarter for the Dow and the S&P 500, up 1.4% and 1.9%, respectively. For the first half of the year, the indexes are up 2.9% and 2.7%, respectively.

The Nasdaq, on the other hand, is down for the last three months — off 0.6% — and in a 3.3% hole for 2016.

Stock market gains picked up Thursday after Bank of England governor Mark Carney said the central bank would likely have to inject fresh stimulus this summer to offset the downside economic risks of the Brexit vote.

Wall Street was also looking beyond Brexit, and began shifting its focus to key coming events stateside, such as the June employment report next week and the start of the quarterly corporate earnings season.

BREAKING- European Union cut to AA from AA+ by S&P, outlook to stable -Full Text

The European Union (EU) supranational borrows on the capital markets to lend 
to member states and certain other governments on a back-to-back basis. The 
long-term rating on the EU partly relies on the capacity and willingness of 
its 28 members to support it. We currently rate the EU at 'AA'.)
OVERVIEW
  • After the decision by the U.K. electorate to leave the EU as a consequence of the June 23 consultative referendum, we have reassessed our opinion of cohesion within the EU, which we now consider to be a neutral rather than positive rating factor.
  • We think that, going forward, revenue forecasting, long-term capital planning, and adjustments to key financial buffers of the EU will be subject to greater uncertainty.
  • As a consequence, we are lowering our long-term rating on the supranational European Union to ‘AA’ from ‘AA+’ and affirming the ‘A-1+’ short-term rating.
  • The outlook is stable, reflecting our opinion that under most scenarios, including a U.K. withdrawal from future (though not current) budgetary commitments, our anchor ratings on the EU will remain at the current level of ‘AA/A-1+’.

Credit Suisse Raises Gold, Silver Price Targets To $1,500; $18.75

Just days after Goldman threw in the towel on its bearish gold call, the gold bulls are crawling out of the woodwork and none has been more vocal than Credit Suisse which moments ago hiked its gold price forecast to $1,500 which the world’s 3rd most systematically risky bank expects the yellow metal will hit in the first quarter of 2017.

According to CS, gold and silver are now its top picks in the metals space: “gold forecast to peak at $1,500/oz in Q1/17: We raise our gold price forecast by 8% in H2/16 to $1,413/oz and 10% in 2017 to $1,450/oz on prolonged macro and political uncertainty following the Brexit vote. We see an extended timeframe for a negative real rate environment in the US and abroad and continued gold buying by central banks and consumers to diversify wealth. Our silver price forecast increases by 12%, to $18.75/oz, in H2/16 and by 15%, to $19.03/oz, in 2017, following gold.”

Full speech from BOE’s Mark Carney

Here’s the speech link and the pertinent parts

Here’s the main important part of the speech.

“The Committee will make an initial assessment on 14 July, and a full assessment complete with a new forecast will follow in the August Inflation Report. In August, we will also discuss further the range of instruments at our disposal.

I can assure you that in the coming months the Bank can be expected to take whatever action is needed to support growth subject to inflation being projected to return to the target over an appropriate horizon, and inflation expectations remaining well anchored. “

The speech started thusly:

“The result of the referendum is clear. Its full implications for the economy are not.

The UK can handle change. It has one of the most flexible economies in the world and benefits from a deep reservoir of human capital, world-class infrastructure and the rule of law. Its people are admired the world over for their strength under adversity. The question is not whether the UK will adjust but rather how quickly and how well.

Is Europe In Trouble Again: Hints Of Portuguese, Italian Bank Bailouts Suggest Not All Is Well

In the aftermath of Germany refusal to allow Italy to breach Eurozone regulations, and provide its banks with up to €40 billion in new capital, Italy has unveiled a new track to handle its insolvent banks and as Reuters reports, the Italian government may have to inject capital directly into weaker banks to bolster their financial strength, a government source said on Thursday, adding it was waiting for the results of stress tests being conducted by European banking authorities. The results of the tests are expected to be published at the beginning of the third quarter.

The source told Reuters the government was also working on a plan to increase the firepower of bank bailout funds Atlante, which was set up in April to help lenders raise cash and sell bad loans, by 3-5 billion euros ($3.34-5.57 billion) by the summer. The source said the government was in talks with private pension funds to seek additional contributions for Atlante.

Other contributions were expected to come from the state lender Cassa Depositi e Prestiti and from a public company called Societa per la Gestione di Attivita.

And then, in a surprising follow up, the EU appears to have once again backtracked when Reuters headlines emerged suggesting that Europe would provide up to €150 billion for Italian banks”

IMF: UK needs ‘smooth’ Brexit transition

The International Monetary Fund has called on the UK and EU to work towards a “smooth and predictable transition” as Britain negotiates its exit from the bloc.

Warning that the UK’s EU exit has created “significant uncertainty” for Britain and the wider global economy, the IMF said the fall out from the referendum would dampen near-term economic growth.

Speaking in Washington today, IMF spokesman Gerry Rice said there would be a “prolonged period of uncertainty” emanating from the vote.

In the run up to the referendum, the IMF has made consistent warnings about the economic and political threats from a “Brexit”.

Commenting after the result, Mr Rice said the UK economy could be hit as the fallout from the vote could lead to “associated declines in consumer and business confidence, which would mean even lower growth”.

The fund said it would provide a full update on the consequences in its World Economic Outlook released in July.

In the meantime, policymakers should “do everything they can to mitigate” the impact, said Mr Rice, praising efforts from the Bank of England and European Central Bank, which have pledged additional liquidity to global markets if necessary.