Wednesday, October 27, 2010

QE2 is coming...This November

Now a Days its mostly debated about QE2 across the boards and its implications on world economy.QE2 is nothing but Quantitative Easing a form of monetary stimulus which involves buying bonds from public.

Who is doing this ?  Managing the Federal Reserve's Balance Sheet

The central bank is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, a measured approach in contrast to purchases of nearly $2 trillion it unveiled during the financial crisis.
 QE1 happened during crisis and they reacted in a number of ways,like purchases and reducing fed rate to near zero (0.25%) etc..

So what will happen if it buys back bonds from public?
The aim is to drive up the prices of long-term bonds, which in turn would push down long-term interest rates. It hopes that would spur more investment and spending and liven up the recovery.
The announcement is expected to be made at the conclusion of a two-day meeting of its policy-making committee next Wednesday.

So what are its implications?
 Growth will stay below trend, inflation below target and unemployment uncomfortably high—albeit with reduced risk of a double dip. For the Fed to come close to fulfilling its dual mandate of full employment and price stability, QE3 or QE4 may be needed in 2011.

 How about EM are like India?
EM is the main focus of the U.S. capital outflow. Leveraged carry-trades may pause for breath now that so much has been priced-in, but the real-money portfolio shift is likely to continue, causing near-term out performance, but sowing the seeds of future bubbles.
The talk of Fed going for QE2 brought huge inflows into indian Equity markets with FIIs investing a record $6.11 billion in October 
"FIIs see better rate of returns in emerging markets and India is set to attract a disproportionate share of inflows," Reliance Mutual Fund's head of equities Sunil Singhania said
 But with this FII flows its  obvious that rupee will appreciate and this inturn will hinder growth in exports which can be a cause of worry in near future.

           No FII inflow cap, but Re checks possible: FM
At this time, I am not thinking of putting any cap on FII (foreign institutional investment) inflows.
 The government ruled out curbs on foreign portfolio investment into the equity market, but said the central bank may intervene in the forex market to check rupee appreciation that was hurting exports

The current levels of capital inflows, which exceed financing requirements of the current account deficit, have put pressure on the rupee, resulting in its appreciation over the last few months.

The RBI has already expressed concerns over rising capital flows, which could further increase after further monetary tightening, which looks imperative in view of the sticky inflation.
Lets welcome November we will see a new game across countries related to forex,interest rates.inflation,unemplyement.

Friday, October 22, 2010

HSBC India Services PMI-Economic Indicator

 About the PMIs
Purchasing Managers’ Indices (PMIs) have been specially developed to provide economic analysts, purchasing professionals, business decision-makers and policy makers with accurate and timely data to help better understand business conditions. In particular:
  • central banks in many countries use the data to help make interest rate decisions;
  • analysts in the financial markets use PMI data to reliably forecast official data such as GDP;
  • forecasters and planners in the corporate sector use the PMIs to help anticipate changing business conditions and to benchmark performance.
The indices are based on monthly questionnaire surveys of carefully selected companies which provide an advance indication of what is really happening in the private sector economy by tracking changes in variables such as output, new orders, stock levels, employment and prices across the manufacturing, construction, retail and service sectors.

The HSBC India Services PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in around 350 private service sector companies.

The HSBC India Composite PMI is a weighted average of the Manufacturing Output Index and the Services Business Activity Index, and is based on original survey data collected from a representative panel of over 800 companies based in the Indian manufacturing and service sectors.

Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. For each of the indicators the ‘Report' shows the percentage reporting each response, the net difference between the number of higher/better responses and lower/worse responses, and the ‘diffusion' index. This index is the sum of the positive responses plus a half of those responding ‘the same'.

Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change. An index reading above 50 indicates an overall increase in that variable, below 50 an overall decrease.

October Month PMI report

Growth of activity in the Indian private sector economy slowed to weakest pace in
ten months in September
India's service industry is stepping off the throttle. Along with the manufacturing sector, growth is slowing, although the expansion continues. Price pressures, however, have not eased meaningfully, which represents a challenge for the central bank. The pace of hiring has slowed as well,even if it remains in positive territory. All this suggests a mild easing of demand growth since the red-hot pace earlier this year, but is hardly enough to relax the guard on inflation. Monetary officials may still need to tighten further to avert price pressure from becoming entrenched
It shows the growth which happened from the start of this year is slowing a bit and next month report will give a confirmation for this trend.With the Hot money coming into India it will be tough task for RBI to maintain exchange rate ,interest rate and inflation all Hitting at the same time .

Thursday, October 21, 2010

What is Beige Book

There is economic indicator called Beige Book.It is a  report published eight times per year and Two Wednesdays before every Federal Open Market Committee (FOMC) meeting.

Each Federal Reserve Bank gathers informal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis.

The Beige Book report is a lagging indicator, in that it is a report of what already happened in the districts, not what the Fed Districts think is going to happen. On the other hand, many economists consider it a leading indicator, in that it could get the Fed to change the Fed Funds rate which is, in itself, a leading indicator

Reports from the twelve Federal Reserve Districts suggest that, on balance, national economic activity continued to rise, albeit at a modest pace, during the reporting period from September to early October
 Latest beigebook

The Beige Book aims to give to give a broad overview of the economy, bringing many variables and indicators into the mix. Discussion will be about things such as labor markets, wage and price pressures, retail and ecommerce activity and manufacturing output. Investors can see comments that are forward-looking; the Beige Book will contain comments that look to predict trends and anticipate changes over the next few months or quarters.

More can be found at this location:

Tuesday, October 12, 2010

FII's are Holding the Frontiers and DII's on a Killing Spree

My Recent posts on FII vs DII positions are the below links

September 15th : 19000 crossed...Whats next for Markets
July 4th : FII and DII investments in India
May11: Buying and Selling of FII vs DII

As we are now into 20000 need to look the flow direction and it looks like the flow direction from DII side is not changed as well as flow of funds from FII side is not changed.

FII flows into Indian Market is very Strong and this led to NIFTY cross 6000 mark,as FII believed India has growth story even when the rest of world is struggling and this led to more funds coming into India.I think the same Thing happened in 2007-2008 times before we came crashing down due to liquidity crisis. And this time chance of happening the previous crisis is very less cause there is abundant liquid in market .

At the same time governments across the world(US,EU) are ready to put more work at there printing presses.Especially US going for QE2 which might increase global liquid and there is good possibility that FII might be attracted and pour money  into EM which has growth story and specifically India.But there is a small tension across the rooms of currency war brewing in some parts of world, investors need to be cautious before they go for full fledged war

DII are on selling spree for a very long time and it looks like they aren't tired for now and especially the month of October the net position is very huge on negative side

Now comes  another intresting question? who are these DII which are on selling Mode in Indian Market.
For one thing DII are local people and they know the local conditions and there companies much better than FII. But when FII are Buying mode why are these people on selling mode.Yes one can understand that valuations might be a little stretched and they dont want to take risks or they might be taking profit and churning the portfolia. 

If thats the case why Retail investors are pulling money from MF from very long time. Is it purely because of SEBI banning entry and exit loads on MF products and distributors not selling them. I strongly believe that retail investors are bit intelligent and they know the mistakes they have done in past and looks like there are redeeming there units from MF as market looks a bit stretched .I don't have Data to support this. But my friend with whom i had a heated arugment will provide data for me:).
Will post on this more some time later 

Monday, October 11, 2010

Emerging Market Economies Leading Global Growth...But for how long?

Over the weekend lot of discussion happened at IMF,Washington DC and below RBI governor's comments on Role of Emerging Economies Going Forward and Key Policy Challenges

Here he talks about the Role of Emerging markets played in pulling the global markets from near depression and how its going to make impact to the rest of world going forward.

I guess when the EM was at peak in 2007  and rest of developed countries at the start of downward direction i  remember few saying that EME are decoupling from the rest of developed economies and EM will go up..but what happened  after that...every one knows....and same set of people after the crash in 2008 said that EM are  recouping with the rest of the world....Now fast forward from there to 2010 the same set of people :) are again started to say that we are decoupling again from the rest of the rest of world is still struggling from the wounds it got from the crash and are growing near 2 % to 3% when EME are going at near 8% to 9% .

So how is this happening ? Basically there is plenty of Liquidity across the developed nations which is sitting idle as there are very less opportunities in there regions for growth so a whole lot of money is being pumped to EME. Now Question is how much more can they pump into these economies? It depends if US going for another round of QE2 (probability of happening this is there wounds are not healed enough...same with the case of EU....) then i strongly believe that EME are going to see huge inflows which are never seen or heard. At least in India FII inflow is going to touch 1 trillion for the first time..

Another question coming to my mind..What if due to a policy decision are another unknown reason if money starts flowing out of EME..what is going to happen? and economy as such will go in South direction.

But before that happening can our regulators or persons with power can make some decisions to arrest the flow if such kind of event happening in near future and RBI governor said this at IMF over weekend
Furthermore, in evaluating the level of reserves and the quantum of self insurance of a country, it is important to distinguish between countries whose reserves are a consequence of current account surpluses and countries with current account deficits whose reserves are a result of capital inflows in excess of their economy’s absorptive capacity.
India falls in the latter category. Our reserves comprise essentially borrowed resources, and we are therefore more vulnerable to sudden stops and reversals as compared with countries with current account surpluses
I doubt it...cause one reason might be RBI going soft under the pressure from Ruling parties and key allies  are going for elections in some states...

It would be interesting to watch the policy makers game on tacking inflation,BOP and Exchange rate  in coming days ...