Month: October 2016

The second pillar refers to the spike in equity and credit risk given investors have been forced to move out along the “risk curve” in pursuit of extra return in what Parrilla refers to as “the desperate search for yield”.

The next stage of the theory sees bubbles developing and spiraling out of control, forcing central banks to step in at precisely the moment where they can no longer contain the situation. This, according to Parrilla, could ultimately end with an explosion in foreign exchange risk,destabilizing fiat currencies and creating significant upside for gold.

Parrilla draws a parallel between OPEC and central banks,cautioning on the moment when real control dissolves into only an appearance of control.

“A scenario a bit like happened in oil with OPEC, where fora while it looks like they’re in control, there’s a perception that this thing can continue forever until they stop being in not in control,” he said.

However, despite the dramatic outlook, Parrilla says this scenario could be sidestepped should the U.S. and other major central banks manage to execute a smooth normalization of monetary policy.

As the extended period of abnormal monetary policy continues and equity and bond valuations approach record levels, calls have mounted in recent months for lawmakers to do more to support central banks with fiscal levers. Monetary policymakers are viewed as having done much of the heavy lifting to keep the global economy afloat in recent years and ECB (European Central Bank) President Mario Draghi has been among the key voices highlighting the unsustainability of central banks maintaining such a burden.

Gold was trading down again in Thursday’s session with the precious metal tracking lows not seen since late June. This as investors await U.S. non-farm payrolls data on Friday for the latest gauge on U.S. economic activity and its effect on the market’s perceived likelihood of a Federal Reserve rate hike in December.

According to Parrilla, while there may be a further slide ahead, it could make sense for some investors to buy now, depending on their investing time horizon.

“I think it may well be this is the point to step in but with the perspective that this is a long-term trade,” he said.

“Who knows what’s going to happen in the short-run. You have to have a long-term perspective in gold.”

The Reserve Bank of India’s (RBI) monetary policy announcement may indicate the central bank will water down its previous inflation-targeting framework, according to Nomura analysts.

It set its medium-term inflation target at 4 percent, within a band of plus or minus 2 percent, but maintained the 5 percent target by March 2017.

The target for the real neutral interest rate, or the rate at which the economy is growing at its trend rate with stable inflation, was also lowered to 1.25 percent on the back of lower global rates, from an earlier range of 1.5 to 2 percent.

“We believe that there has been a dilution of the tenets of flexible inflation targeting framework under the new regime compared with the old regime,” said Nomura analysts Sonal Varma and Neha Saraf in a Tuesday note.

They noted that under the old regime, led by former Governor Raghuram Rajan, the RBI was clear about lowering inflation to 4 percent by March 2018 and keeping it there. The new medium term target was “too wide a range, without a specific time commitment to the midpoint.”

Consumer price inflation in India eased to 5.05 percent on-year in August, compared with July’s 6.07 percent, on the back of slower rises in food prices. Wholesale prices were up 3.74 percent on-year, a touch higher than July’s reading of 3.55 percent, but below market expectations.

Analysts, however, pointed out most of the growth drivers were consumption-oriented, which could put pressure on prices in the future.

For the real rate target, Varma and Saraf said they were not sure about the “sanctity of the new number,” and with global rates near zero, they expected it to be lowered further.

The makeup of the RBI’s decision-making has also changed: This was the first meeting with a six-member Monetary Policy Committee (MPC), which was led by new Governor Urjit Patel.

The MPC effectively gives the government a voice in central bank decision-making through three appointed external members. Previously, the central bank governor alone made policy decisions.

On Tuesday, all six members voted to lower the repo rate.

The RBI said it expected India’s growth momentum to quicken, with a normal monsoon season expected to raise agricultural growth and rural demand, while plans to raise government employee salaries would provide stimulus to urban consumption spending.

Strong improvements in farming practices were expected to improve the food inflation outlook, the central bank added.

Earlier this year, the Indian government followed recommendations from the Seventh Pay Commission’s recommendations and announced a 23.55 percent hike in salaries and pensions for nearly 10 million current and former government employees, reported Reuters.

Radhika Rao, an economist at Singapore’s DBS Bank, said the MPC would find it challenging to keep to their inflation target in fiscal 2017-18 and would need to work closely with the government to keep prices stable.

That’s in part because the 4 percent inflation target implicitly held the RBI responsible for the direction of food prices, which is the largest component of the consumer price index (CPI) basket, according to Rao.

In order to bring down overall inflation, food prices needed to be under control.

They were, however, dependent on things outside the RBI’s influence: the weather, seasons and the infrastructure in place to ensure the delivery of agricultural produce from farms to the homes of consumers.

“As we witnessed in the past three years, the RBI had little direct control over the price increases of cereal in fiscal 2011-12, vegetables in fiscal 2012-13 and pulses [legumes] last year,” she said, adding this was where the RBI needed government support to keep food prices under control.

The government had been working to keep inflation stable by removing diesel subsidies, modestly raising the prices at which it buys crops from farmers and implementing administrative measures to curb hoarding and other malpractices that intentionally keep food supply low, Rao said in a Tuesday note.

For example, in late 2015, local media reported nearly 75,000 tons of legumes were seized from hoarders in as many as 13 states.

She also pointed out several other obstacles to the RBI’s medium-term inflation target: higher aggregate demand next year due to a normal monsoon, salary increases from the Seventh Pay Commission’s recommendations and steady-to-higher food prices from structural inadequacies caused by uneven rainfall throughout the country during the monsoon season.

Traders may focus again on trading in Deutsche Bank shares Tuesday, as German markets reopen and the countdown to Friday’s employment report continues.

The US-traded shares of Germany’s largest lender closed Monday well off lows at USD 12.98 a share, or about 0.8 percent lower. The stock hit record lows last week and bounced in volatile trade as investors are concerned about the future of Deutsche Bank as it faces the US Department of Justice’s demand for a USD 14 billion settlement.

“That will keep the market a little uneasy for the next month or two,” said Dan Deming, managing director at KKM Financial. “As long as there is no formal resolution that will weigh heavily on the market.”

He’s watching to see if the S&P 500 can hold the 2,150 level. “A close below 2,150 would have a negative impact on expectations here at least for the next couple days,” he said.

US stocks closed slightly lower Monday, with the Dow Jones industrial average falling 54.30 points to 18,253.85, and the S&P 500 down 7.07 points to 2,161.20. The real estate sector lagged, followed by utilities.

Treasury yields climbed, helped by a better-than-expected ISM manufacturing report at 51.5 in September versus 49.4 in August. The US two-year Treasury yield hit 0.802 percent, its highest since September 21, while the US 10-year Treasury yield hit 1.626 percent, its highest since September 23.

“It’s moving toward recognition that the Fed may be raising rates in December,” Krosby said, adding that “we have a ways to go” before then, including the jobs report.

Friday’s scheduled release on September employment is the key data for the week. Ahead of that time, no major data is scheduled for Tuesday release and traders will eye two US Federal Reserve speakers for indications on the likelihood of a December interest rate hike.

Richmond Fed President Jeffrey Lacker is scheduled to speak on the economic outlook at 8:05 a.m., ET, while Chicago Fed President Charles Evans is set to speak at 7:40 p.m., ET, on monetary policy and the economy.

“That’s going to keep us busy because everybody’s going to hang on every word for something that’s not going to happen for three months,” said JJ Kinahan, chief strategist at TD Ameritrade.

However, Evans is an alternate member of the Federal Open Market Committee, while Lacker is not a voting member. On Monday, voting member Cleveland Fed President Loretta Mester said on Bloomberg that November would remain a compelling option for raising rates if data were to come in as expected.

The Fed did not raise rates at its September meeting, and most analysts don’t expect the central bank to move at its November meeting since it comes just days before the US presidential election and there is no scheduled press conference.

The US vice-presidential debate is scheduled for Tuesday evening. Darden Restaurants is set to release earnings ahead of the open, while Micron is scheduled to report after the close.

Political risks scared companies off inking deals so far this year, according to Dealogic—except for Chinese and Japanese firms that hunted US and European targets.