Wed, 25th May 2016

Anirudh Sethi Report


Archives of “capital markets” Tag

Oil Bankruptcies Hit Highest Level Since Crisis And There’s “More To Come”, Fed Warns

“Two things become clear in an analysis of the financial health of US hydrocarbon production: 1) the sector is not at all homogenous, exhibiting a range of financial health; 2) some of the sector indeed looks exposed to distress [and] lifelines for distressed producers could include public equity markets, asset sales, private equity, or consolidation. If all else fails, Chapter 11 may be necessary.” That’s Citi’s assessment of America’s “shale revolution”, which the Saudis have been desperately trying to crush for more than a year now. 

As Citi and others have noted – a year or so after we discussed the issue at length – uneconomic producers in the US are almost entirely dependent on capital markets for their continued survival. “The shale sector is now being financially stress-tested, exposing shale’s dirty secret: many shale producers depend on capital market injections to fund ongoing activity because they have thus far greatly outspent cash flow,” Citi wrote in September. Here’s a look at what the bank means:

India: A Scent Of A Bubble

I am not sure Bubble’s have a smell. May be the soap bubbles do, but that is essentially the fragrance in the soap. India however, has it’s own soap-in capital markets. Stocks soar, Debt yields decline and almost every bystander believes that it is India’s God given right to grow at 15 per cent per annum forever. So it is uncommon not to see a brokerage fix a Sensex target of 100,000. Not to be outshone the biggest show man of India’s capital market forecast a Nifty of 130,000 just the other day at the Birthday celebrations of a Blue Channel.

Newbies have come out of with fancy price projections for the stocks they cover. Bosch at 30,000, Apollo Tyres at Rs 300, MRF at 37,000 and Suprajit at 170-all ofcourse being Indian Rupees. If such fanciful prophecies come true then some Indians will be extremely rich over the next decade. There is a simple flaw in this line of thinking. Crude. Oil is supposed to remain at USD 60/bbl forever, and India will get all the capital it needs at Zero cost for perpetuity to fulfill all the promises that the newly crowned right of centre junta.
More than 90 per cent of these new Regents have no prior experience to Rule, far less to deliver. The hypothesis that Oil will remain in the USD 60-70 range itself is a myth. Just 5 months ago it was at USD 115/bbl. And there were immense global threats from ISIS and Libya that Oil will go to USD 150/bbl. So how come, suddenly the so-called Commodity Super-Cycle so touted in the decade of 2004-2014 suddenly vanish.

Emerging Markets-An Update

1) Brazil’s central bank is not tapering its FX intervention plan

2) The Philippine central bank outlined the tools it will use to counter Fed tapering
3) The RBI is taking further steps to improve the liquidity situation and help stabilized capital markets
4) There were some notable trade data surprises out of Asia
5) Israel central bank delivered a dovish surprise rate cut
1) Brazil’s central bank is not tapering its FX intervention plan. Central bank president Tombini assured markets that the $60 bln intervention plan is not about to change. Given the positive performance of the BRL and the Bovespa, many had started to speculate that officials would soon start to get concerned again about excessive currency strength, especially after USD/BRL broke below the 2.20 level. The real should continue to trade on the strong side for now, but we would soon start to look for opportunities to take the other side, especially against the Mexican peso.
2) The Philippine central bank outlined the tools it will use to counter Fed tapering. The bank is sounding very confident about its ability to deal with further volatility in the PHP – and we mostly agree, at least compared with many other EM countries. According to Deputy Governor Guinigundo, “We can ride out any turbulence, as we have policy tools in our hand that we can deploy anytime.” He also said the measures include boosting dollar and peso liquidity, careful surveillance of risk, use of forward guidance, tapping currency swap agreements, and possible tightening of monetary policy. Read More 

China taking measures to stimulate growth says Premier Li

  • China economy in transitory period
  • Stimulus won’t help deep problems in China
  • Emerging markets are facing downward economic pressure
  • International economic situation is complex
  • Needs transmission for sustainable growth
  • Taking steps to contain local government debt problem
  • Continuing to push interest rate reform
  • Economy is well and stable
  • Will keep monetary policy stable even if capital markets show volatility
  • Boosting consumption the biggest structural reform needed
  • Will safe guard lower limits of growth and employment

China’s Premier Li Keqiang speaking at the World economic forum in Dalian via Bloomberg & Reuters

Republican Offers To Vote For Syrian Strikes If Obama Returns Nobel Peace Prize

According to the latest whip count on Syria attack proposal in the House, 237 reps oppose a such a strike and 169 are undecided with just 27 are for. While this number guarantees that no vote will ever come to pass, and humiliate Obama, who if anything will revoke the punt to Congress from September 1 and unilaterally engage in strikes to appease assorted Saudi/Qatari interests, all that would take for the 27 Yay votes to become 28, would be for Obama to return the Nobel Peace Prize.

According to The Hill, a Republican lawmaker said he’ll vote to authorize military action against Syria if President Obama returns his Nobel Peace Prize. The line between reality and an alternative Onionesque universe is thin, but this is not a joke. Read More 

Analysts look past non-farm payrolls to September tapering

As a crucial August US employment report edges closer, analysts are sounding more bullish on job creation and focusing on its implications for the Federal Reserve’s stimulus spending.

A Reuters poll predicts that 180,000 jobs will have been created outside the agricultural sector, in Friday’s non-farm payrolls data.

It’s the last indicator of its kind before the Federal Reserve must decide whether or not to begin phasing out its quantitative easing bond-buying measures in September.

Its Open Market Committee policy making body meets in two weeks, and is widely expected to start tapering its asset purchase programme then.

With job creation a crucial test of the US economic rebound, a strong non-farm payrolls report today could make such a move more likely.

Deutsche Bank’s strategist Jim Reid thinks the number will beat Reuters forecasts: Read More 

FIIs pull out $10.5 bn from Indian capital market in June-July

Foreign investors have pulled out a staggering over Rs 62,000 crore (USD 10.5 billion) from the Indian capital market in the past two months amid concerns about the depreciating rupee.

Market analysts expect selling pressure by foreign institutional investors (FIIs) to continue in the near term.

FIIs had withdrawn Rs 18,124 crore (USD 3 billion) from the debt and equities markets in July after pulling out a record Rs 44,162 crore (USD 7.5 billion) in June, according to data available with Sebi.

More than Rs 45,000 crore (USD 7.7 billion) were pulled out from the debt market in June and July, while over Rs 17,000 crore (USD 2.8 billion) were withdrawn from equities.

Weakness in the Indian currency was instrumental in overseas investors exiting the capital markets as the rising cost of hedging a volatile rupee hurts the yield differential the FIIs work with, according to market experts. Read More 


The nation’s largest lender State Bank of India needs Rs 2,30,000 crore in additional capital to meet the stringent Basel III requirements till 2018, a top official has said.

“We need about Rs 2,30,000 crore of additional capital for Basel III up to 2018. Out of this, Rs 1,50,000 crore is of tier I and the rest Rs 80,000 in tier II capital,” SBI managing director and chief financial officer Diwakar Gupta told the news agency here in an interaction.Gupta, who is retiring after nearly four decades at SBI towards the end of the month, further said the requirement is for a five-year period. The bank is comfortable on the capital front at present and also expressed confidence that the lender will be able to manage this huge amount, he added. Read More 

EU banks still pose systemic threat

Europe’s banks need to shrink their balance sheets dramatically to ensure the continent can withstand another financial crisis, according to an analysis by Royal Bank of Scotland.

Eurozone banks must shed at least €2.7tn in assets by 2016 for their balance sheets to be “sustainable”, RBS economists have calculated in a research note

The sector’s assets are worth about €33tn currently, or nearly three and a half times the single currency zone’s annual gross domestic product.

“If you have a banking crisis and banks are three times the size of their underlying economy, then governments will not be able to support them all,” said Alberto Gallo, head of European credit research at RBS.

“[Europe’s banking system] is the biggest in the world and arguably too big . . . in Japan, Canada and Australia the banking sectors are about twice the size of the economy, while the US is around the same size [as the economy].”

Since mid-2012 eurozone banks have reduced their balance sheets by €2.4tn according to data from the European Central Bank in Frankfurt. However, there is “at least €2.7tn more to go” according to RBS – a reduction that would bring banks’ combined assets down to about three times eurozone GDP. Read More 

Central banks bought Treasuries as private investors dumped them

As interest rates started to rise in May, global central banks boosted purchases of US Treasuries, with demand from China, France and Ireland particularly strong. But private investors, such as hedge funds based in the Caribbean, went the other way in droves.

The bulk of the buying was concentrated in Treasuries, with central banks adding $40.3bn of the securities, while private accounts sold $32,3bn in May, according to official data released on Tuesday. China and France bought $25.2bn and $6.2bn in Treasuries, respectively.

Vivianne Rodrigues, US Capital Markets correspondent, reports that global central banks took on the securities in the aftermath of strong US employment data in April, which sent the jobless rate to a four-year low. But the the move did not pay off. Read More