Month: May 2013

Has a new era dawned for Greenback?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The US dollar has been a currency in decline for decades. Yet signs of strength in the US economy, a stock market boom and the prospect of the US becoming a net oil exporter in the next few years all suggest the tide may be turning for the world’s most widely-used currency.

“I do believe we’ve seen a favorable shift in sentiment towards the US dollar,” said Ed Ponsi, managing director at Barchetta Capital Management in New York. “Ten years ago it was widely assumed that the euro would eventually supplant the dollar as the world`s reserve currency, but that is no longer the case.”

(Read More: Better US Economy Throws Wrench in Currency Markets )

The dollar index, a measure of the dollar’s value against currencies of the United States’ major trading partners, last week hit its highest level in almost three years at 84.50. It held near that peak on Wednesday, a day after strong US data lifted the blue-chip Dow Jones Industrial Average to a record high.

The downtrend in the dollar has lasted almost 30 years because of weaker economic growth and more recently by money printing to fund asset purchases by the Federal Reserve.

The dollar index is currently at around 84.25 – well below a peak above 157 hit in 1985 and where it traded just under 120 before the tech-bubble burst in 2001. Still it has been creeping higher this year and the trend is expected to pick up in coming months.

Signs of change

Strategists say the fact that the dollar is rising in tandem with the SandP 500 stock index is a bullish sign for the currency as it suggests foreign investors are moving into US equities and snapping up the greenback to do so.

Foreign holdings of US stocks and bonds have more than doubled since 2005, data released from the US Treasury earlier this month showed. Of the USD 13.26 trillion total worth of stocks and bonds held by foreigners, USD 4.2 billion was held in stocks in 2012, a 10.6 percent increase from 2011.

(Read More: Foreign Holdings of US Securities Have Exploded)

“The fundamental change this year is that the dollar is no longer a risk-on, risk-off currency,” George Saravelos, European head of currency strategy at Deutsche Bank, told CNBC Europe’s “Squawk Box” on Tuesday.

“The SandP 500 is up hugely this year and yet the dollar is stronger, which is unusual from previous years. This is one of the key reasons why we`re bullish on the dollar – the breakdown in the [negative] correlation reflects underlying changes in portfolio flows moving much more into the US,” he said.

(Read More: Dollar Rising With Equities Is Bullish Sign for Stocks )

Expectations that the US will turn from a net importer of oil to net exporter over the next few years given the production of US shale oil also suggests a stronger outlook for the dollar, analysts said.

And while the US economy may not be running at full steam , the US is in better shape than recession-hit Europe or Japan, which is just pulling itself out of the doldrums and that’s another spur for dollar bulls, who have started to anticipate an unwinding of Fed’s monetary stimulus.

“The dollar is still historically at low levels, but we think the dollar trade is positive and will turn higher,” said Patrick Bennett, currency strategist at Canadian bank CIBC.

HSBC last week revised its dollar forecasts. For instance it expects the euro to fall to USD 1.22 early next year from a previous estimate of USD 1.37. The euro stood at around USD 1.2854 on Wednesday.

“Our dollar bullishness does not rely on an early tapering [of quantitative easing], but if the Fed acted sooner than we expect then the dollar would capitalize,” HSBC analysts said in a note. “The dollar has already risen but this is just the beginning.”

– By CNBC.Com`s Dhara Ranasinghe; follow her on Twitter @DharaCNBC

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Banks navigated rulebooks for 20 years: BoE’s Tucker

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Paul Tucker, the Bank of England’s deputy governor, has accused investment banks of spending the last 20 years trying to dodge the rules.

He warned that under the Bank’s new regulatory regime, officials would use their judgement to decide when banks were at risk of failure or when bosses were not fit to do the job – rather than rely on a prescriptive rulebook.

The tough talk comes just one month before the arrival of new Governor Mark Carney, who beat Tucker to the top job despite him being the bookies’ favourite.

Read More: UK watchdog says accountants must quiz banks more

But Tucker said Carney would agree with the judgment-based approach to regulation and added he shared the values embodied by Eddie George, the former Governor who led the bank to independence.

Tucker, who refused to be drawn on speculation that he is considering a move to become chairman of Lloyds Banking Group, said that prudential regulation worked more effectively when banks did not get the opportunity to search out loopholes.

“Despite claiming not to like tick box supervision… over the last 20 years [banks] have found their way around the rulebooks,” said Tucker.

Read More: UK Property Price Rises Stoke Fears of New Bubble

He added: “A good deal of the problems that gave rise to the crisis manifested themselves in banks navigating around the rulebook.”

In the question and answer session at the Institute for Government, Tucker said prudential supervision offered a financial health-check, where regulators looked for symptoms of problems rather than simply applying rules.

“In prudential supervision measures of capital adequacy and liquidity adequacy are indicators, not the rules,” he said. “The kind of questions the prudential regulatory authority will be putting to management from time to time: your bank isn’t as strong as you think it is, come back on your risk in your book; I’m afraid you are not fit to run the bank.”

Read More: Asset Purchases Taper Is Least of Banks’ Worries

He said the sentiment would have been recognized by George and was a familiar concept for both King and Carney.

But Tucker questioned whether the City would really “embrace” the judgement-based world when regulators began to use those powers in earnest.

The new rules should make it possible for individual banks to fail, but when they do, they system must ensure the whole system does not grind to a halt, he said.

Within the global framework, the biggest financial institutions did not need to be too safe to fail. Rather, banks needed to be allowed to fail because it was possible for them to do so in an orderly way.

He added that he was confident that incoming changes would ensure that if banks collapsed in the future, losses went to bondholders rather than taxpayers.

“Bankers have been slow to understand that the debate about regulation won’t go away until the economy is healed,” Tucker said.

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Why people get so emotional about gold

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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I recently wrote an article for CNBC about why I thought gold was going down. It was a pretty straightforward article, I thought, maybe even a bit dull with its echoes of Economics 101.

Well, I couldn’t have imagined the response I got, which were mostly negative and angry. The experience made me wonder: why were so many people so upset with me for trying to explain why gold has been going down?

Gold peaked in September 2011 and the decline has accelerated recently, with the price down over 20 percent since last October. This is a fact. You would think that investors in gold would want to understand why it’s falling so that they can decide whether to get out now or, if they think the reasons for the decline are wrong, buy more. So why get so upset? The answer to that has a lot to do with what makes someone a good investor. It’s a lesson that everyone should learn if they are going to invest in anything.

(Read More: What the Silver Chart Is Telling You About Gold )

The reason is what behavioural finance calls cognitive dissonance. Cognitive dissonance is what you experience when you find out something that goes against your beliefs. The best example is the typical TV news interview with a murderer’s mother. She always says what a good boy her son is, he would never do anything like that, he loves his mother, he loves his dog, etc. etc. This is normal. When faced with some new information that goes against our long-held beliefs, most people prefer to ignore the new information or rationalize it away rather than change their beliefs.

(Read More: Even Another Cyprus-Style Crisis Can`t Save Gold )

The more time and effort people have invested in those beliefs, and the more costly it would be for them to admit that the new information is true, the greater the dissonance that they experience and the greater the need that they feel to reduce it. Reduce it not by changing their beliefs, but by ignoring or discrediting the new information.

So a mother, who’s spent years and years raising her son and does love him, would naturally just refuse to believe that he’s a murderer. And an investor who owns a lot of gold, subscribes to newsletters about gold, talks about gold with his friends, and has made a lot of money in gold in recent years, is likely to refute or reject any new information that says now might not be the best time to buy gold.

This is especially so because most people have a lot more confidence in themselves, their knowledge and their decision-making abilities than they should. I could see that in the responses to my article, some of which showed an imperfect understanding of economics at best.

For example, one reader who execrated me for saying bank reserves aren’t money, argued that they are money because the US Federal Reserve pays interest on them, which ignores the fact that the Fed didn’t pay interest on them before 2008, the European Central Bank currently doesn’t pay interest on them, and the National Bank of Denmark actually charges a fee for holding them! Yet they were very confident in their opinion. Overconfidence is a big problem in investing.

Unfortunately, if someone does begin to feel unsure about their beliefs, then they usually won’t try to learn more to see if their beliefs really are true. On the contrary, they`ll generally take action to justify their existing beliefs. This is called confirmation bias. They will sort through the article and pay greater attention to any facts that support their position than the facts that don’t. They`ll try to find some small part that they “know” is wrong, and will therefore feel justified in ignoring the whole thing.

The important point to learn from this is that investors have to realize their own biases and tendencies and deal with them when investing. The market doesn’t care what you believe any more than the rain cares whether you get wet. You can’t let your emotions get in the way of your understanding the market, otherwise you can get swept away.

(Read More: Gold Bears, Beware! Don`t Take On Central Banks )

Cognitive dissonance can be deadly when it comes to investing. When you’re investing, it doesn’t matter whether you are right or wrong; what matters is whether you make money. You shouldn’t invest to prove something about yourself, to prove to other people that you’re smart or that you’re right, because at some point you’re definitely going to be proven wrong. Some losses are inevitable in investing. It’s not a shame. It’s not a disgrace. It’s normal. One of the keys to being a good investor is therefore to minimize your losses.

Confirmation bias can also be deadly. Naturally, it’s more pleasant to read things that you agree with than things that you don’t agree with. But if you don’t try at least to understand why some people think differently from you, you’re going to lose money sometime. It doesn’t matter how smart you are; nobody can know everything. That’s why stop-loss orders were invented. As the famous investor Howard Marks said, “you can’t predict. You can prepare.”

You have to have a plan before you go into a trade. You have to understand why you are taking a position, you have to have a target for how far you think it will go (since nothing goes up forever) and you need to decide on the stop loss level: the point at which you decide you were wrong and get out of the trade.

If you want an emotional experience, go on a date! Get married! That’s where your emotions should come into play. In investing, our emotions are our enemies. We have to understand them and conquer them or else they can cause us to defeat ourselves.

The author is the Head of Global FX Strategy at IronFX, an on-line trading firm specializing in Forex, CFDs on U.S. and U.K. stocks, and commodities. He was previously Head of the Forex Committee at Deutsche Bank Private Wealth Management.  

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

On second thought, maybe Fed tapering won’t be so bad

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Wall Street came back from the long weekend with a rosier view about possible tapering by the Federal Reserve. The Fed’s eventual throttling back on the liquidity injections might indicate a much stronger economy – and that could be good for cyclical stocks, according to strategists.

Although markets last week fell on concerns that the Fed may soon start curtailing its bond purchases as economic conditions warrant, many do not expect the buying to stop until the economy can stand on its own.

(Read More: Where’s the Value in the Market?)

“The Fed is not going to prematurely tighten or remove accommodation,” Michelle Meyer, US economist at Bank of America Merrill Lynch, told CNBC. “That’s what [Fed Chairman] Bernanke made very clear in his testimony.”

Doug Foreman, co-chief investment officer at Kayne Anderson Rudnick Investment Management, echoed those comments. The Fed won’t start to pull back “until they can see the whites of the eyes of an economic recovery,” he said.

That may still be a few months off, as overall growth remains sluggish. Economists expect revised first-quarter gross domestic product numbers Thursday to show only a 2.5 percent expansion.

But there are encouraging signs that consumers have been resilient, despite the weakness. Consumer confidence numbers Tuesday were pretty much at pre-recession levels, Meyer said, calling recent consumer data “a pretty decisive turn in consumer confidence.”

(Watch: How to Position for the 2nd Half of the Year)

The jobs data remain paramount, however, given the Fed’s instance that any change in monetary policy will be driven by the economy—particularly a rebound in the labor market.

This Thursday, markets will get figures on weekly jobless claims to scrutinize for signs of improvement in the jobs market. The next employment report is due a week from this Friday, and economists expect creation of 165,000 nonfarm jobs and 7.5 percent unemployment, according to estimates from Reuters.

Consumer data will be the focus again Friday with the release of April personal income and spending numbers, as well as a May consumer sentiment reading.

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“As the summer months progress, the economy will look a lot better than people think,” Deutsche Bank economist Joe LaVorgna said. That could let the Fed start tapering in September, he added.

If the economy keeps getting better and the Fed is able to taper, investors may want to consider more economically sensitive cyclical areas. By the time the Fed is ready to curtail its bond purchases, the “rotation from defensive to cyclicals will be well underway,” said Art Hogan at Lazard Capital Markets.

“Think about what’s going to play out over the next 12 to 24 months, which will be much more cyclical in nature,” Hogan told CNBC. “You want to look at technology; you don’t want to look at utilities.”

Over the past three months, financials, consumer discretionary and technology have been among the market’s best-performing sectors, while utilities have lagged badly.

(Read More: ‘Lion’s Share’ of Stock Gains Are Still Ahead: Altman)

While they’ve already started to move, cyclicals remain cheaper than their defensive counterparts, potentially giving them more room to run.

According to Sam Stovall at S&P Capital IQ, defensives are trading at about 17.5 times 2013 earnings, versus 15 times for cyclicals and 15.9 times for the broader market. He said he likes consumer discretionary and is “warming” to industrials.

Other strategists agree. Jerry Castellini of CastleArk Management told CNBC that he likes financials, industrials and energy, which will benefit as the economy improves. “The greatest thing the market could have happen to it would be for the Fed to taper,” he said, as it would mean higher earnings for some of the market’s riskier areas.

“So far in May, we’ve seen a big rotation out of defensives, and I think this continues through year end,” said Savita Subramanian, strategist at BofA Merrill Lynch. “While the easy money in the market might have been made at this point, the way to play equities is to focus on the undervalued cyclical growth options that are trading at pretty depressed multiples.”

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Talent shortage: Employers struggle to fill vacancies

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A survey of thousands of international employers revealed that one in four employers is struggling to fill vacancies, despite unemployment soaring to record highs in Europe and beyond.

The survey from the world’s third-largest recruiter, Manpower Group, showed that 35 percent of nearly 40,000 employers surveyed globally during the first quarter of 2013 reported difficulties in finding staff with the right skills – the highest shortage since the start of the recession.

(Read More: Data Suggests Europe’s Largest Economy Picking Up Steam)

Of those, 54 percent of employers believe this will have a high or medium impact on their ability to meet client needs, an increase from 42 percent in 2012.

The survey showed that, despite the record number of people unemployed and looking for work, many of them “often simply do not possess the key skills employers are looking for, indicating a clear mismatch between educators and employers in preparing young people for the workplace,” Manpower’s survey said.

The research reveals that talent shortage is endemic across the world but has been felt most acutely in Japan (85 percent of employers), Brazil (68 percent) India (61 percent), Turkey (58 percent) and Hong Kong (58 percent).

(Read More: Amazon Workers in Germany to Striker for Higher Pay)

The survey comes just a few weeks after the International Labor Organization (ILO) estimated that 73.4 million young people or 12.6 percent of young people aged between 15 and 24 around the world are expected to be out of work in 2013, a jump of 3.5 million between 2007 and 2013.

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The ILO reported that it had seen a deterioration of employment prospects in both developing and advanced economies, but particularly in Europe, where the unemployment level is 12.1 percent in the euro zone area and youth unemployment above 50 percent in Greece and Spain.

(Read More: Alarm Over Skills Shortage in Europe)

Manpower’s survey showed that 26 percent of employers cited difficulty finding the right talent in the Europe, Middle East and African region (EMEA).

The roles most difficult to fill around were skilled trades workers, engineers and sales representatives. Employers also reported that accounting, finance,management and executive positions were increasingly hard to find.

Those having the least difficulty finding the right talent to fill jobs are in Ireland (3 percent), Spain (3 percent), South Africa (6 percent) and The Netherlands (9 percent).

(Read More: US Manufacturers Cautious on Europe)

“The fact that employers in Europe still report talent shortages when youth unemployment remains one of Europe’s biggest challenges is a call to action for businesses, education and governments to collaborate to solve this mismatch,” Jonas Prising, president of the ManpowerGroup, said. “Companies and education providers must collaborate effectively on post-crisis curricula, targeted skill development and skills matching,” he added.

Meanwhile,in regions experiencing a lesser decline in growth, the lack of skilled workforce was also hindering employers.

Thirty-nine percent of employers in the Americas and, for the first time in the survey’s history, more than half of employers in Asia said they were having difficulty filling vacancies.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

More rate cuts in Australia? Here’s why not

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The fact that the Australian dollar has fallen more than 8 percent against the US dollar from an April high could be reason enough for the Reserve Bank of Australia (RBA) not to cut interest rates again this year, say strategists.

“The RBA’s biggest concern recently has been that the Aussie dollar has been as high as it has been, so some depreciation of the Aussie dollar is going to make the RBA feel a lot more comfortable,” Paul Bloxham, chief economist for Australia and New Zealand Bank told CNBC Asia`s “Squawk Box.”

Also read: Come on, Give the Aussie Dollar a Break: Pros 

Up until, two weeks ago the Aussie dollar had held firmly above parity with the greenback before being knocked down by a broadly robust US dollar, a fall in commodity prices and signs of weakness in China – Australia`s biggest trading partner.

Bloxham said the recent weakness in the Australian dollar was a reason why he believed the RBA was done with cutting interest rates this year.

The RBA has slashed its key borrowing rate by 200 basis points since late 2011 to bolster its economy from weaker global growth, a slowdown in mining sector investment and a strong currency that has hurt exporters.

Economists say the central bank is nearing the end of its monetary easing cycle amid signs that the lower borrowing rates are supporting the economy and a slide in the Aussie dollar makes a compelling case for no further easing.

Australia’s currency has fallen about 5.6 percent since the RBA cut rates by a quarter of a percent to a record low of 2.75 percent on May 7. It hovered around USD 0.96 on Tuesday, within sight of an 11-month low hit last week at about USD 0.9592.

Read More: Is It All Downhill for Commodity Currencies?

“The RBA has an easing bias but our view is that they are done for the rest of the year,” said Nick Maroutsos, founder and managing director at Kapstream Capital. “If the Aussie dollar was trading at this level when the RBA last cut rates I think that it would have probably not cut or treaded a bit more carefully,” he told CNBC.

Sentiment towards the Australian dollar, one of last year’s best performing currencies has turned increasingly bearish this month with some strategists forecasting a fall to USD 0.80. Even with that decline, the Aussie dollar is still up some 22 percent from where it traded four years ago.

Read More: Goldman Warns of Big Move in Australian Dollar

“The primary reason why the RBA cut interest rates [in May] was because they [policymakers] were worried about the damage that a strong currency could do the economy,” Kathy Lien, managing director at BK Asset Management, said in a research note.

“Now that the Aussie dollar has fallen more than 8 percent from its April high, the bar is high and the economy would need to deteriorate significantly for the RBA to consider another rate cut,” she added.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Oil prices, dollar may set off on new relationship

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The United States is in the midst of a surge in energy production, one that could realign one of the market’s most reliable barometers: the inverse link between the US dollar and oil.

Generally speaking, what’s good for the dollar tends to be negative for oil, and vice versa-but the US oil boom might be altering that rule of thumb.

With the US suddenly awash in oil and gas, it has raised the question of whether the greenback can join the ranks of the dollars of Canada and Australia or the krone of Norway as a “commodity currency”-which tend to correlate directly with the price of oil.

“Energy is no longer a source of cost [for the US] but a source of profit and employment,” said Alessio de Longis, a portfolio manager at OppenheimerFunds.

Also read: Bernanke’s Testimony Critical to Oil Prices

“The case for the US to become a net energy exporter is probably far away in the future,” he added, “but what we are already seeing…is the correlation between the dollar and energy has been much weaker.”

According to de Longis, the negative correlation between the greenback and oil has currently fallen to zero, becoming more similar to the link between crude and the currencies of Canada and Australia.

Those two currencies normally trade with oil 50-60 percent of the time, but that positive correlation has dropped to 20-30 percent recently.

Also read: US Oil Production Is Nearly Even With Imports

Calling surging US production a product of an “aggressive exploration of shale resources,” Bank of America said US output has jumped to 7.3 million barrels of oil per day, “with production in the Lower 48 states increasing at a yearly rate of 920 thousand b/d, or 22 percent.”

For now, the US has miles to go before it reaches the echelon of an Oil and Petroleum Exporting Country (OPEC) powerhouse, or even a non-OPEC country that exports oil. Additionally, the fact that the US still imports most of its crude – and has yet to export its own bounty – is an immediate barrier to the greenback evolving into a commodity currency.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said that because the US economy is highly diversified, the dollar is unlikely to trade like a petro-based currency. The massive capital flows that find their way into US assets will still be the biggest determinant to the dollar’s levels, he said.

Also read: Pressure Mounts on US to Export Natural Gas

“The way I can see the energy story helping the dollar is through importing less, and our cheaper energy…would locate more manufacturing here,” Chandler said. As a result, foreign customers “will be able to buy more of what`s built here.”

Currently, the world’s largest energy consumer is importing far less energy – oil imports recently plunged to their lowest levels in nearly 20 years. That has implications for other countries that rely heavily on energy imports, as well as their currencies.

“We’re really talking cycles into the future” for the dollar to become positively correlated with oil, said Oppenheimer’s de Longis. However, “the immediate consequence is the switch from the dollar to yen as the clearest negative correlation to energy.”

Indeed, Japan’s energy costs have skyrocketed as the yen has plunged and the Bank of Japan has hypercharged its monetary policy. “In terms of swings and changes [to energy prices], Japan is most exposed to fluctuations in energy markets,” said de Longis.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Two big Asian rivals start ‘beautiful friendship’

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Although largely reported as a fence-mending exercise in the wake of recent Sino-Indian border incidents, the Chinese Prime Minster Li Keqiang`s visit to India last week was mostly about trade and finance between the two countries representing one-fifth of the world economy and a prodigious market of about 2.5 billion people.

The talk of mutual trust and consultation mechanisms was very much in the air, but the economy was on everybody`s mind. While welcoming his Chinese guest in searing 46 degree Celsius heat, Prime Minister Manmohan Singh knew that in a few days he would be standing next to his boss, the governing Congress Party leader Sonia Gandhi, waving a copy of his Report to the People – a sort of manifesto before next year`s general elections – where India`s declining economic growth is mainly ascribed to the euro area`s recession and a sluggish U.S. economy.

It is a good bet that Mr. Singh suspected that Indian voters might think otherwise. A dispiriting thought no doubt at the time when the Congress Party is bidding for a third five-year term to lead the world’s largest democracy. Not so much because, predictably, the opposition Bharatiya Janata Party (BJP) promptly dismissed the idea that India`s flagging growth was a result of weak export demand. No, Mr. Singh surely expected that the BJP would put the blame squarely on the government`s mismanagement of the economy.

But the next blow was shattering: An opinion poll released last week showed that, if elections were held now, 31 percent of respondents would vote for BJP, while the Congress Party would get only 20 percent of the vote.

The weak economy will make it very tough to turn this situation around in the months ahead, even if there are no further desertions of the coalition partners and no major corruption scandals. Indeed, facing binding policy constraints of high inflation and budget and external deficits, it will be quite a challenge to stabilize the economy around its current 5 percent growth rate.

And the path from there to India`s estimated growth potential of 8 percent will be even more difficult if there is a reversal of large capital inflows on growing speculations about less accommodative monetary policies in the United States and similar policy corrections in Japan. Markets are already signaling these events. Reversals of capital flows have also been foreshadowed in recent warnings by the Reserve Bank of India.

Also read: This Could Devastate India`s Prized IT Sector

How Can Trade With China Help?

Capital outflows, or even slowing inflows of foreign savings, would put an end to India`s further credit easing to stimulate domestic demand, because the financing of India`s large trade deficits (6-7 percent of the gross domestic product) would require rising interest rates.

That is the economic environment in which Mr. Li`s visit to India was taking place. And the question is: What role could a China guanxi (connection) play? There are several possibilities.

First, China could – and should – quickly deliver on its promise to buy more to reduce its huge trade surplus with India. In 2011-2012, India`s trade deficit with China was one-fifth of its total trade gap.

The fact that Indian exports to China had picked up considerably (growing 25 percent in 2011-2012) over the past three years is proof that there is a broadening range of Indian goods and services of interest to Chinese companies and consumers.

Also read: China May HSBC Flash PMI Hits 7-Month Low on Weak Demand 

Second, China could buy more of India`s assets. That would be an appropriate quid pro quo for India`s large purchases of Chinese exports – and a way of supporting India`s domestic demand that underlies imports from China. A sort of Bill Clinton`s old message to Japan about trading with America: “If you don`t buy, you won`t sell.”

Third, and perhaps the most important, China could balance out its huge trade surplus with India by stepping up its direct investments. Mr. Singh invited these investments – particularly in infrastructure and manufacturing – during his talks with Mr. Li last week.

Clearly, such investments could build on multi-billion dollar contracts signed in the area of renewable energy, infrastructure, electrical energy and iron industry during last November`s Second India-China Strategic Economic Dialogue in Delhi.

Beginning of a `Beautiful Friendship?`

The big question is: Will rivalry and old enmities get in the way of the enormous potential of Sino-Indian economic ties?

I don`t think so. The political and strategic relationship between the two countries has changed, despite irritants presented by 15 unsuccessful rounds of border talks – seemingly intractable legacies of colonial times.

Throughout this arduous and literally uncharted negotiating process, Beijing and Delhi have been steadfast in pledging peaceful solutions to disentangle their real estate problems.

They are probably reminded of the fact that it took 40 years for Russia and China to solve the issues along their 4,300 km border, and that solutions became easier as the two countries` relations continued to improve.

Things seem to be moving in the same direction between China and India. Apparently good atmospherics during Mr. Li`s visit last week, intensive dialogue at highest government levels, and the resumption of joint military exercises are showing that relations have moved on from sporadic and ad hoc platforms of the past.

The fact that Mr. Singh told the media that “we have also discussed the possibility of infrastructure development to link India`s north eastern region with Bangladesh, Myanmar, China and other countries in the Southeast Asian region” is a clear indication of more confident and stable ties.

This is a far cry from publicly vented anger, suspicions and strategic misgivings at a mere mention of similar access routes to China only a few years ago.

Also read: Yoshikami: Low Cost China Is Old News

I also believe that the evolving and increasingly more structured BRICS (Brazil, Russia, India, China, South Africa) relationships are providing a suitable forum to anchor Sino-Indian interests on a common agenda transcending purely bilateral issues.

Largely ignored by most analysts, BRICS projects – such as the group`s currently negotiated development bank (an Indian idea), along with security and strategic initiatives in Central and North-East Asia and in Africa – have the potential to foster closer Beijing-Delhi ties.

That is probably what Mr. Li had in mind when he talked about Beijing`s determination to take its relations with India to “new heights of strategic growth,” reiterating the metaphor of a “handshake across the Himalayas.”

Responding to that, India`s soft-spoken and scholarly prime minister talked about India and China as “civilizational neighbors who have lived in peace through the ages.”

And, saying that he accepted Mr. Li`s “gracious invitation to visit China at the earliest opportunity,” it all sounded like Humphrey Bogart`s final line from the movie Casablanca: “Louie, I think this is the beginning of a beautiful friendship.”

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Choppy bond markets put Japan banks on edge

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The volatility in the Japanese government debt market has unnerved investors in domestic banks, with some of the country`s biggest lenders alone holding an estimated 40 trillion yen (USD 390 billion) worth of these bonds.

A spike on Thursday in the benchmark 10-year Japanese government bond (JGB) yield to 1 percent – its highest level in a more than a year – fanned worries about the potential for massive paper losses for banks and led to heavy selling in banking stocks listed on the Nikkei.

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Mitsubishi UFJ Financial, Japan’s largest lender by assets, has about 48.7 trillion yen worth of JGBs, according to the bank`s latest financial statement.

While at still relatively low levels, yields have jumped more than 55 basis points from a record low of 0.315 percent hit just after the Bank of Japan (BOJ) unveiled its radical monetary stimulus on April 4, undermined by uncertainty over what the BOJ’s new policies mean for the debt market.

“Banks are the ones that could suffer the most from balance sheet problems because of JGB volatility,” said Ben Collett, the head of Asian equities at Sunrise Brokers in Hong Kong.

“The banks will have a problem should JGBs come off and that is the trend that could continue. But bank business is not just about JGB holdings so that`s an important point,” he said, adding that he was looking to buy shares in “high quality” Japanese banks following Thursday’s stock market sell-off.

The Nikkei dropped over 7 percent in what was its biggest one-day drop in over two years, while Japan’s three biggest banks Mizuho Financial Group , Mitsubishi UFJ Financial and Sumitomo Mitsui Financial Group slumped between 7 percent and 11 percent on Thursday.

Despite the sell-off, Japanese banks have strong financials . According to ratings agency Standard and Poor’s, Japan’s five major banking groups achieved their strongest financial results in the fiscal year that ended in March, since 2006 on the back of positive tax effects, overseas business and increased fee income.

Also Read: Data to Show Signs of Life in Japan’s Economy?

“We take the view that the [banking] groups’ stable profits and relatively low asset risk by international standards support each group`s credit quality,” SandP said in a report earlier this week.

The Nikkei gave up early gains on Friday to trade more than 1.5 percent lower. Banking stocks edged down in line with the broad-market weakness to trade 0.5- 1 percent lower.

In the bond market, yields pulled back from Thursday’s peaks with the 10-year JGB yield to around 0.84 percent.

Nothing Unusual

Analysts said one factor that could help calm bank shareholders` worries about bonds is that the market is not as volatile as it might look.

“Bond volatility may have risen, but it is not outside the normal range: 30-day volatility is just under a standard deviation above the long-term average and 60-day volatility is just over,” said Nicholas Smith, Japan strategist at the brokerage CLSA in Tokyo.

Smith said the fact that Japanese yields were rising was in sync with a rise in bond yields in other major debt markets and so was not unusual.

The trigger for Thursday`s spike in yields followed an overnight rise in US Treasury yields as bond investors fretted about an early end to the Federal Reserve`s quantitative easing program following comments from Fed Chief Ben Bernanke.

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“I`m not particularly worried about the rise in JGB yields – so what if we are at 90 basis points? Bond yields around the world are rising,” Smith told CNBC`s “Cash Flow.”

The rise in yields also meant the bonds could become attractive to institutional investors such as pensions funds. Their buying, together with buying from the central bank, could help slowdown the rise in yields, analysts said.

Tai Hui, chief Asia-Pacific strategist at JP Morgan Funds said that he expected the 10-year JGB yield to rise to around 1.1-1.3 percent over the next 12 months – implying a rise of roughly 20 basis points from current levels.

An earlier version of this story said that Japanese banks held 40 trillion yen (USD 390 billion) worth of these bonds. This version corrects that to say some of the biggest banks hold this number.

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A too-strong US economy? Why everyone’s watching?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Markets will be hyper-focused on the economy in the week ahead and whether there`s any sign it is getting strong enough to encourage the Federal Reserve to start pulling back the security blanket of quantitative easing.

In the holiday-shortened week, none of the data will make a huge difference in the Fed`s decision-making, but it will add to the picture on the economy. There is consumer confidence, pending home sales, personal income, and revised first-quarter gross domestic product.

But weekly jobless claims Thursday could be the most anticipated because of what it might say about the job market, a week before the June 7 release of the crucial May employment report, which is important for the Fed.

“CNBC always jokes about how every jobs report is the most important jobs report, but this is the most important jobs report we`ve seen in a long time,” said Daniel Greenhaus, chief global strategist at BTIG (and CNBC contributor). “I`m not saying it will be, but if it comes in at 275,000, it`s game over.”

The May jobs report is the next mile marker for the Fed, since restoring job growth is part of its mandate and it has targeted a 6.5 percent unemployment rate as a point where it may start to roll back its zero-rate policy.

If there is improvement significantly beyond the 165,000 jobs created in April, the Fed is expected to look for confirmation in the next several monthly reports.

Also read: Fed’s Bullard Wants Faster Inflation Before Tapering QE

“We`re at the home stretch and that`s why this vacuum between now and the nonfarm payrolls is going to be a dripless market for bonds and equities,” said George Goncalves, Treasury strategist at Nomura Americas.

“The assumption is things are going to get better. What if it`s a weak number? Can we actually talk about not tapering? We`re on edge about everything.”

“The NFP (nonfarm payrolls) is what I`m hanging my hat on. If the NFP is strong, the Fed could think about bringing it forward, but even June is too soon,” he said. “The chairman himself said the markets have the same data we have.

They are going to make a decision on fundamentals and targets. If they`re stopping QE, it`s because they feel comfortable for the outlook for the economy, and that should not be viewed as a bad thing.”

Financial markets have been locked in debate about how and when the Fed will back away from its USD 85 billion monthly bond-purchase program, or quantitative easing. The debate took shape as Fed officials this month voiced their varied views on when it should happen, with the most hawkish pushing for June.

But Fed Chairman Ben Bernanke woke the market to the possibility the Fed could be ready to start “tapering,” or cutting back on its purchases in the next couple of months, depending on the economy`s progress.

Even though that same view was expressed earlier by New York Fed President William Dudley, the comment from the Fed chairman before a congressional committee sent markets on a rollercoaster Wednesday.

By Thursday, reports of the contraction in China PMI for the first time in seven month sent markets tumbling in Asia and Europe.

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That report also hit oil and industrial metals, like copper, hard, but they recovered losses along with US stocks as the trading day progressed.

Stocks are up more than 16 percent for the year and are at an important crossroad where the market can act spooked by what not too long ago was construed as good news.

Nuveen Asset Management Chief Equities Strategist Bob Doll said the current state of the economy is just right for stocks and should keep them moving higher until the economy looks too good, or robust.

“It doesn`t last forever, but it goes until it doesn`t anymore,” said Doll. “My view is let`s not try to make something too complicated. Let`s recognize that the economy is improving fast enough for stocks to be satisfied but slow enough that the Fed stays dovish.”

Even if the Fed tapers its bond purchases, that doesn`t mean it ends the program or that it will start selling the USD 3.339 trillion in mortgages and Treasurys it holds on its ballooning balance sheet.

James Paulsen, a long-time bull, said the current environment is making him a little cautious. The Wells Capital Management strategist said an improving economy could keep rates moving higher, and that could pressure stocks. The 10-year note broke above 2 percent this past week for the first time since March.

Paulsen, too, is watching claims data, after the past week`s claims fell by 23,000 to 340,000, and the continuing claims declined by 112,000 to 2.9 million during the week ending May 11, in the largest decline in more than a year and the lowest level since before the financial crisis.

The claims are for the week ending May 18, which is the survey week for the May employment report. Economists were watching them closely, and JPMorgan economists said while they expect payroll growth to be slower in the second quarter than first quarter because of fiscal tightening, the claims are indicating the weakness in labor might not be that severe.

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“If claims keep falling toward 300,000, QE is over,” said Paulsen. “I just think if you get a (monthly jobs) number closing in on 200,000 again, the discussion within the Fed will definitely go toward tapering. It`s very encouraging that the Depression scaredy-cat Fed is actually starting to talk about normalizing policy. … I think China is a more frightening thing. I`d like to see them regain footing. I`m not sure the market is really that worried about the Fed going away from QE. There`s been more discussion this year about the Fed tapering QE than at any other point.”

Paulsen said he still expects the market to move a bit higher, but it should be more of a sideways move for much of the second half of the year, consolidating before moving higher later.

“The Chinese economy is an issue. I think the global recovery can go on without Europe. It can go on without Japan. It could conceivably go on without the United States, but it cannot go on without the emerging world,” he said, adding China is in the process of adjusting to a slower growth rate. “I`m not over the top on it because I think there`s growth in other parts of the world, but it`s a little concerning.”

But U.S. growth is improving and that should help stocks. Paulsen doesn`t buy that it`s the Fed that`s pushed up the market, in contrast to other analysts and traders.

“Stocks are going to have a hard time for the rest of the year because bond yields are going to keep rising,” he said. “I think that people are underestimating economic growth and sustainability. It`s going to be hard for this thing to fall if we`re going to grow closer to 3 than 2 percent for the second half.”

Many analysts had expected a “Sell in May” market this year, since that had been the pattern of the last several years, and they had expected the economy to be pressured by sequestration and other federal budget cuts.

While manufacturing data is running soft, the impact so far has not been as bad as some expected.

Housing has been a bright spot, with existing home sales continuing to improve in April to the highest level in 3 1/2 years.

Doll also sees the improving economy lifting stocks, but with help from the Fed. “It`s far more than the Fed. The economy is improving. We have modest improvement, modest earnings growth. We`re not going to get a robust economy.

That`s precisely the good news for the stock market. My view is an acceptable economy is best for the stock market. If you get a strong economy, the Fed will disappear and we`ll get inflation. Right now, we`re in the sweet spot,” he said.

What Else to Watch

Stock traders will also be watching bonds in the coming week, as the Treasury auctions USD 99 billion in two-year, five-year and seven-year notes Tuesday through Thursday.

“Given the sharp rise in yields, we would expect they`ll be well-subscribed. May is a unique month. There`s usually a bid for index buying,” Goncalves of Nomura Americas said.

Rates can go higher, he said, but not much without more proof that the economy is improving. “Rates won`t go higher just because the Fed stops. If the Fed stops too early, rates will go lower,” he said.

Paulsen said rising rates could slow stocks as they adjust, but will not stop the market from going higher. He said based on history, it would take a level above 4 percent to stop stocks from rising.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow