Fri, 23rd June 2017

Anirudh Sethi Report


Archives of “downside risk” Tag

79.2% of investors concerned about China’s downside risks

Interesting contrast between Japan and China in this special poll of investor sentiment done by Barclays.

Asked which countries or regions are expected to see “high downside risk in the near future”, four-fifths of investors cited China. Only one-fifth cited Japan.

A separate question revealed that 71 per cent of respondents were concerned about geopolitical risks. Barclays senses a link between the two:

It was evident that concern about geopolitical risk is linked almost entirely to China’s downside risk.

India’s economic growth prospects remain weak, says OECD

India’s growth prospects in the near term are still weak and is facing financial turmoil triggered by possible tapering of quantitative easing policy in the US, according to Paris-based think-tank OECD.

The projection comes against the backdrop of slowing growth in India as well as rupee falling sharply amid high level of current account deficit (CAD).

The Organisation for Economic Cooperation and Development (OECD) today said that near term growth prospects are mixed for emerging Asian economies.

There are signs of growth stabilisation for China and a more positive outlook for the Philippines and Singapore, “while still weak growth prospects for India”, it said.

As per the grouping’s latest Asian Business Cycle Indicators (ABCIs), the key imminent downside risk facing South-east Asia, China and India is the turmoil in the financial markets, triggered by the prospects of tapering of quantitative easing (QE) policy in the United States. Read More 

Draghi Points

  • Recent confidence indicators confirm expectation of gradual improvement in economy
  • Monetary policy stance will remain accommodative for as long as possible, will remain in line with forward guidance given in July
  • Will monitor all incoming data
  • Inflation outlook unchanged in medium term
  • LTRO repayments reflect improvement in financial markets
  • Will remain particularly attentive to money market developments for mon pol
  • Blames weather for lack of recovery in early part of year
  • Expects gradual recovery in EZ (weather permitting) 
  • Output expected to recover at slow pace
  • Sees GDP at -0.4% 2013 1.0% 2014
  • Recent developments in money and financial markets may negatively affect economic downside
  • Higher commodity prices pose downside risk to growth
  • Underlying price pressures to remain subdued, inflation anchored
  • Inflation forecast 1.5% 2013 (from 1.4% forecast in June) 1.3% 2014
  • Weak loan dynamics reflect stage of business cycle
  • Loans reflect ongoing credit risk and balance sheet adjustment
  • Fragmentation must decline further, essential to strengthen banks resilience, banking union should do this
  • Countries should not unravel reform efforts
  • States need to continue reforms to increase labour demand Read More 

CLSA-Asia In Limbo Land

From Malaysia, Indonesia, India, Thailand and Vietnam most nations are under CAD stress. All may collapse big time if tapering starts next month. The big Question at 10y US fetching 3 per cent will the US slip into recession, bringing the whole world to it’s knees.
The problem for Asia, most particularly interest-rate sensitive markets like Hong Kong,Singapore and Asean, is that it is easy to see the downside risk if monetary policy normalises in America, a trend likely to be reflected in a sharply appreciating US dollar. The easy parallel here, if not a precise one, is the sideways trading pattern in Asia between 1994 and 1997 (see Figure 5), when Hong Kong, Singapore and Asean dominated the asset class far more, before the Asian Crisis detonated decisive deflationary market moving action. Meanwhile, the rest of the Asian equity asset class is far from straightforward. China faces the structural challenge to its growth model, as discussed frequently here, while in India growth continues to slow and currency risks grow as investors respond nervously to the mixed signals sent by the central bank and the finance ministry; even if confirmation this week that Raghuram Rajan has become RBI Governor will be a positive for sentiment, at least temporarily

India: Turbulent Times

 india-turbulentLast year, we highlighted two key themes for India: slowing potential growth due to worsening macroeconomic imbalances and a chronic balance of payments problem. This has largely played out, with growth at a decade low and the current account deficit at a record high.

·     Today, the government is starting to move in the right direction by implementing economic reforms, inflation has eased and USD/INR has adjusted, with INR depreciating to a record low. Is India’s economy at a turning point? We do not think so.

·     We remain negative over the next six to nine months because of deteriorating external finances, feedback effects (and likely policy responses) from a weak currency, a worsening growth outlook and the upcoming election cycle, which raises the risk of disappointment around reforms.

·     In our view, while weak growth and recent government actions will help to correct India’s macroeconomic imbalances, the external sector remains India’s Achilles’ heel. We believe that risk of further capital outflow remains large, and hence, we see risks of further INR depreciation. We remain concerned with possible policy responses and their macro impact. Read More 

Fitch: Emerging Market Strains Weigh on Growth Outlook

Fitch Ratings says in its newly published Global Economic Outlook (GEO) that it expects the global economy to strengthen gradually in H213 and 2014-15 as the US gathers steam and the eurozone approaches a cyclical turning point. However, the agency has cut its 2013-2014 growth forecasts for all four of the BRIC nations. Its latest forecasts for world GDP growth are 2.4% in 2013, 3.1% in 2014% and 3.2% in 2015 (weighted at market exchange rates).

For the major advanced economies (MAE), Fitch forecasts weak growth of just 0.9% in 2013 before accelerating to 1.9% in 2014 (both practically unchanged from the March GEO) and 2.0% in 2015 (included for the first time).

“Several of the largest emerging markets are experiencing strains from spill-overs from advanced economies and China, difficult policy trade-offs, a declining impact from credit growth and structural bottlenecks. Therefore growth differentials will narrow between advanced economies and emerging markets over the forecast horizon” says Gergely Kiss, Director in Fitch’s Sovereign team. Nonetheless EM growth will continue to far outstrip the pace in MAEs and to strengthen from 4.8% in 2013 to 5.2% in 2014-2015.

Fitch estimates that 2012-2013 will see the second weakest BRICs’ growth (after 2009) since the Russian crisis in 1998. It forecasts China to grow by 7.5% in 2013 (down from 8.0% in the March GEO) and 2014, followed by 7% in 2015. The agency has also cut its growth forecasts for other major EMs. Downward revisions for India, Brazil and Russia total 0.8pp, 1.1pp and 1.7pp for 2013 and 2014, respectively. Read More 

Nikkei Ends Lower On Dlr Decline Vs Yen

Tokyo stocks fell for the first time in three trading days Tuesday, with the Nikkei Stock Average slipping 38.72 points to end the day at 13,529.65.

The dollar declined to the upper-98 yen range, prompting selling of exporters, including carmakers and machinery makers. Property developers and banks also traded lower, as investors sensed greater downside risk.

Trading value on the first section of the Tokyo Stock Exchange stayed below 3 trillion yen for the third straight session.

IMF Slashes World GDP Expectations; Japan Only Beacon Of Global Growth Hope

While expectations for global GDP growth are now expected to be +3.3% for 2013 against +3.2% for 2012, the IMF has just slashed the previously rosy 3.6% expectation as the global economy stalls. The US and Europe had significant cuts to their 2013 GDP growth expectations (though of course, this dip recovers hockey-stick-like in 2014). It will perhaps be surprising to learn that Japan had its growth expectation raised the most of all the major advanced and emerging nations. World Trade volume growth has also been cut notably – driven by a fall in the previously supposed driver of growth – emerging markets. The IMF’s less sanguine forecasts, however, are caveated with hope-driven perspective such as expectations that Debt-to-GDP will drop for all nations from 2013 to 2018 and while energy remains a major downside risk to global growth, we were stunned to read that they cite S&P 500 option prices as an indicator of upside potentialIt seems, even at the IMF, that the market is all that matters (oh and the Japanese printing press).

 The global growth projection – quite a cone of uncertainty…with downside risk dominant

As the balance of risks is between oil market concerns and the ebullience of S&P 500 options prices!!! Is it any wonder that VIX is suppressed? Read More 

Retail Investors Souring On Gold

Exchange traded funds have transformed the gold market. Since the first fund was launched nearly a decade ago, the products have become so successful in offering a simple way for investors to buy physical gold that they have acquired the nickname “the people’s central bank”.

But what happens when the people’s central bank decides to sell?

That is the question now haunting the bullion market. Since the start of January, gold ETFs have dumped 140 tonnes of gold. February saw the largest monthly outflow of gold from ETFs on record.

The sell-off is partly a reflection of broader negative sentiment towards gold, as investors become more confident in the global economy and put their money into riskier assets such as equities. Prices have slid 12 per cent since October to less than $1,580 a troy ounce, and are down 18 per cent from their record nominal high in 2011. Read More 

ECB Monthly Report- Strong Euro Downside Risk To Inflation

Main headline from the latest ECB Monthly Report just out.

  • The stronger Euro poses a risk that inflation might undershoot the European Central Bank’s target
  • Recovery was expected to start later this year
  • Risks to the outlook for price developments continue to be seen as broadly balanced over the medium term
  • Upside risks relate to higher administered prices and indirect taxes, as well as higher oil prices, and downside risks stem from weaker economic activity and, more recently, the appreciation of the Euro exchange rate
  • Risks to the outlook for price developments continue to be seen as broadly balanced over the medium term

As usual, the ECB bulletin was virtually identical to its main policy statement after their policy meeting last Thursday