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Tue, 25th April 2017

Anirudh Sethi Report

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Archives of “economics” Tag

Fitch Downgrades Italy To BBB From BBB+

Having largely disappeared from the market’s scope for the past 6 months, ever since Europe “bent” its rule allowing the bailout of Monte Paschi and several smaller banks despite Italy having the greatest amount of disclosed NPLs of any European nation, moments ago Fitch decided to drag Italy right back in the spotlight when it downgraded Italy to BBB from BBB+, citing “Italy’s persistent track record of fiscal slippage, back-loading of consolidation, weak economic growth, and resulting failure to bring down the very high level of general government debt has left it more exposed to potential adverse shocks. This is compounded by an increase in political risk, and ongoing weakness in the banking sector which has required planned public intervention in three banks since December.

And some more:

 Italy has missed successive targets for general government debt/GDP, which increased by 0.5pp in 2016 to 132.6%. This is 11.2% of GDP higher than the target in the Stability Programme of 2013, the year Fitch downgraded Italy’s Long-Term IDRs to ‘BBB+’, and compares with the current ‘BBB’ range median of 41.5% of GDP. Fitch forecasts general government debt to peak at 132.7% of GDP in 2017, falling only gradually to 129.3% in 2020 in our debt sensitivity projections.

 Fitch’s rating Outlook for the Italian banking sector is Negative, primarily reflecting the challenge of reducing the high level of un-provisioned non-performing loans (NPLs), alongside weak profitability and capital generation. The rate of new NPLs edged down to 2.3% in 4Q16, and there is some greater impetus for disposals and write-downs, which has slightly reduced total NPLs. However, sofferenze, the worst category of loans, increased to EUR203 billion in February, from EUR199 billion in October. Total NPLs amount to close to 17.5% of loans and 20% of GDP, and just over half are provided against.

 In our view, political risks have increased since Fitch’s previous rating review. Current polls point to a further hollowing out of support for more centrist parties and to a fragmented political landscape that could result in minority government. Risks of weak or unstable government have increased, as has the possibility of populist and eurosceptic parties influencing policy. Greater populism may dampen political appetite for reform, increase the pressure for fiscal loosening, and weigh on investor sentiment.

With France – and much of Europe – already on edge due to populist tensions, is Italian sovereign – and bank – risk about to make a grand reapparance? For the answer, check in when Europe opens on Monday.

Meanwhile, Italian CDS trades at 190bps, wider than Russia, Croatia and almost as wide as South Africa.

Draghi says risks of deflation have largely disappeared

Draghi statement to IMFC

  • Growth in the Eurozone is firming and broadening
  • There are sign of a somewhat brighter global recovery and increasing global trade
  • Cannot yet have confidence that a sustained rise in inflation will materialize in a sustainable manner
  • Underlying inflation has not shown a convincing upward trend

You could say he’s cautiously optimistic.

Earlier in the year, the market read the optimism as a sign of potential action to tighten but officials have fought back against that idea, and that’s what helped to cap the euro at 1.09.

“As underlying inflation remains subdued and the path of inflation crucially dependent on the prevailing very favourable financing conditions, we cannot yet have sufficient confidence that a sustained adjustment in inflation will materialize in a durable manner,” he wrote.

It’s a similar line to what he said after the March 9 ECB meeting. The next ECB meeting is April 27.

China greasing economy with $55bn in tax breaks

China’s State Council on Wednesday approved 380 billion yuan ($55.1 billion) in tax relief that will mainly favor farmers and small businesses in a move that is seen as both economic and political.

The second large-scale tax cut to follow last year’s comes as China’s economy is forecast to slow down in the latter half of 2017, during which the Communist Party will convene its 19th National Congress and reshuffle top leadership.

China will modify its value-added tax this July by removing the 13% bracket while retaining the 6%, 11% and 17% tiers. The 13% rate currently applies to farm products and natural gas, but they will move to the 11% category. Farmers as well as households that purchase rice and vegetables will likely benefit from this change.

For smaller companies, those that pay 300,000 yuan or less in annual taxable revenue qualify for preferential tax treatment. The ceiling will be lifted to 500,000 yuan. Furthermore, small businesses and startups will be allowed to deduct 75% of research and development costs, up from 50%. These tax breaks will remain in effect until the end of 2019.

The Chinese government enacted about 500 billion yuan worth of corporate tax cuts in 2016. Helped also by a surge in infrastructure spending, the real economy grew 6.9% during the January-March period this year, marking the second quarter of economic acceleration. However, the People’s Bank of China, the country’s central bank, has been gradually raising market interest rates in order to rein in the real estate bubble.

INDIA RETURNED TO FISCAL CONSOLIDATION IN 2016-17: IMF

Notwithstanding the impact of demonetisation, India returned to fiscal consolidation in the fiscal year 2016-17 largely due to the near-elimination of fuel subsidies and enhanced targeting of social benefits, the IMF said on Wednesday.

“India returned to fiscal consolidation in fiscal year 2016/17, supported by the near-elimination of fuel subsidies and enhanced targeting of social benefits, notwithstanding the deceleration in growth related to the country’s recent currency exchange initiative,” the IMF said in its report on Fiscal Monitor released on the sidelines of the annual Spring Meeting of the International Monetary Fund and the World Bank.

The IMF said, in India, the headline deficit is projected to decline modestly in fiscal year 2017/18, with continued delay in reaching the medium-term deficit target.

The budget envisages a growth-friendly fiscal adjustment underpinned by expenditure cuts that protect infrastructure investment, as well as more progressive income taxes for individuals combined with lower taxes on small and medium- sized enterprises.

“The expected rollout of the nationwide Goods and Services Tax (GST) this year will enhance the efficiency of the internal movement of goods and services and effectively create a common national market,” the IMF said.

IMF hikes UK growth forecast to 2% in 2017

The International Monetary Fund has delivered another hike to its UK growth forecast, reversing nearly all of the downgrade it pencilled in after last summer’s Brexit vote.

In its latest assessment of prospects for global growth, the Washington-based fund predicted the UK economy will grow this year by 2 per cent, an increase of 0.5 percentage points from the forecast it made in January. The IMF also upgraded its UK growth forecast for next year, from 1.4 per cent to 1.5 per cent.

The world economy will grow faster than previously expected this year thanks to increased trade, investment and manufacturing said the IMF, which also warned the threat of protectionist policies meant “the balance of risks remains tilted to the downside”.

The revision came primarily due to better than expected economic news from Europe, China and Japan and a broad-based recovery in global manufacturing since the middle of 2016.

Before the UK’s EU referendum last year, the IMF forecasted that the UK economy would grow 2.2 per cent in 2017. But it cut the forecast to 1.3 per cent last July, weeks after the Brexit vote, and downgraded its forecast further, to 1.1 per cent, in October.

Raghuram Rajan Warns “The Fundamental Problems Of The Financial Crisis Are Still With Us”

Raghuram Rajan, Professor of Finance at the University of Chicago and former governor of the Reserve Bank of India, warns of more turmoil ahead if the developed world fails to adapt to the fundamental forces of global change.

 

It is a pivotal moment on the eve of the financial crisis. In the late summer of 2005, the world’s most influential central bankers and economists gather in Jackson Hole at the foot of the Rocky Mountains. The atmosphere is carefree. Financial markets have nicely recovered from the bust of the dotcom bubble and the global economy is humming. Under the topic »Lessons for the Future» the presentations celebrate the era of Federal Reserve chairman Alan Greenspan, who has announced to resign in a few months. Since 1987 at the helm of the world’s most powerful central bank, he presided over a period of continuous growth and was one of the leading forces of deregulation in the financial sector.

 But when Raghuram Rajan steps to the podium the mood suddenly turns icy. At that time the chief economist at the International Monetary Fund, the native Indian warns that unpredictable risks are building up in the financial system and that the banks are not prepared for an emergency. His dry analysis draws spiteful remarks. »I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions», he recollects.

 Soon, however, his prediction turns out to be correct. Less than one year later, the US housing boom runs out of steam which triggers the worst recession since the Great Depression. Today, Mr. Rajan who governed the Reserve Bank of India until last fall and now teaches finance at the University of Chicago, is reputed as one of the most distinguished economic thinkers on the planet. So what prompted him to voice his concerns at that time in Jackson Hole? Where does he think the world stands in the spring of 2017? And what is his outlook for the coming years?

Watching and waiting for China’s capital-control-induced bubble

Anyone in mainland China with a lot of money to move — companies foreign or domestic, or individuals — now seems likely to run into the capital controls that the authorities have thrown up in hopes of stopping a sell-off in the currency.

Real estate tycoon Pan Shiyi has given up on selling the Hongkou Soho, a striking Shanghai office tower whose tenants include Japanese electronics group Panasonic. Located just north of the Bund, the city’s iconic waterfront, the building was designed by Japanese architect Kengo Kuma. Pan had been looking to invest proceeds from the sale overseas but sees little hope of gaining approval for that.

 Similar cases of apparent official obstruction have surrounded other foreign deals. Online game developer Giant Interactive’s agreed-on purchase of an Israeli peer for 30.5 billion yuan ($4.42 billion) remains under review. Technology group LeEco and conglomerate Dalian Wanda Group have yet to complete their respective U.S. acquisitions of television maker Vizio and TV studio Dick Clark Productions.

Meanwhile, total social financing, China’s broad measure of credit and liquidity, continues rising by double digits. With limited outlets to overseas, Chinese money has nowhere to go but domestic assets.

Fed’s Yellen: US economy is ‘pretty healthy’

Yellen comments:

  • A better look at inflation is around 1.75%
  • Housing is ‘a little bit healthier than it’s been’
  • Consumer is helping economy
  • Looking forward, I think economy is going to continue to grow at a moderate pace
  • Financial system is essential for the economy
  • Distorted rewards in financial system contributed to crisis
  • “Appropriate stance of policy now is something close to neutral”
  • We think it’s appropriate to raise rates to a more-neutral level if economy continues to perform
  • Our assessment of neutral is “really not that high”
  • Although we’re close, we’re still below 2% in inflation in my assessment
  • Since the 1980s, the general expectation is the public sees it at 2% despite temporary deviations from that
  • We ‘equally’ don’t want inflation to linger below 2%

Words and actions about the equality of that inflation target don’t match.

More:

  • The fact you could create so many jobs in 2%-growth economy suggests low productivity
  • Economic potential without absorbing labor market slack is probably less than 2%
  • Output per worker has been very slow in recent years, my guess is it will pickup

China economists temper growth expectations after Q1

With China’s gross domestic product widely pegged to maintain growth of 6.8 per cent in the first quarter of 2017, some official economists and state-backed think tanks are already predicting growth will slow markedly in the second quarter.

Zhang Baoliang, a researcher at the economic forecasting department of the State Information Center, was cited by the state-run Securities Times on Monday as predicting growth could slow in Q2 in the face of low external demand, a rising tide of “de-globalisation” and protectionism, uncertain policy outlook from the US, persistent economic imbalances in China and likely reduction in domestic sales of automobiles and housing.

The paper cited Mr Zhang and a number of other economists as predicting growth of 6.8 per cent in the first quarter.

More bluntly, Peking University’s Economic Policy Research Group has forecast GDP growth gradually slowing to 6.5 per cent over the next three quarters, bringing the annual rate to around 6.6 per cent.

At present a median estimate from economists compiled by Bloomberg predicts GDP growth for the first quarter will come in at 6.8 per cent year on year, with 16 of the 36 economists surveyed forecasting exactly that rate.

12 Trading Mantras from Trading Legend Mark Douglas

Fill the “profit gap” with the right things…

In his books and seminars, Mark Douglas often refers to something he calls the “profit gap”. What he is talking about is basically the difference or “gap” between the potential profit you could achieve if you had just followed your trading method and what your actual bottom line results are.

Traders often begin trading a method with very high hopes. They want to produce an income they can rely on and get consistent results from their trading. However, this is only possible if you are trading an effective method with discipline and consistency, which most people simply do not do and as a result, they experience the profit gap that Mark refers to.

The key point that Mr. Douglas makes about this profit gap is that traders typically try to fill the gap by learning more about the market, changing methods, spending more time in front of their computers etc. However, what they really need to learn is more about themselves and how they interact with the market. Essentially, they need to acquire the “proper mental skills” to trade their method as they should and to get the most out of it, in order to properly fill the profit gap.

Winning and being a winning trader are two different things…

Anyone, and I literally mean anyone, even a 5-year-old child, can find themselves in a winning trade. It does not require any special skill to get lucky on any particular trade and hit a winner. All you have to do is open your trading platform and push a few buttons and if you get lucky, you can make a lot of money in a short amount of time.

As a result of the above, it’s natural for a trader who has not yet developed his or her trading skills to take the leap from “it’s easy to win” to “it can’t be that much harder to make a living from this”.

This is how many traders’ careers get started. Needless to say, it is also how they get on the path to losing a whole lot of money just as fast or even faster than they made it.

A winning trader has the mental skills to realize, understand and utilize the FACT that any particular trade he or she takes has basically a random outcome. That is to say, they cannot possibly know the outcome of that trade until it is over. The winning trader knows this and they also know that they must trade in-line with this belief over a large series of trades and ignore all the temptations and feelings that get kicked up on each trade they take. They are able to do this because they keep their eyes on the bigger picture. That bigger picture is the fact that IF they execute their method flawlessly, over and over, over a long enough period of time / series of trades, they will come out profitable.

Thus, do not mistake a winning trade for you being a winning trader, yet. A very easy trap to fall into.