STATE OF GLOBAL
FINANCIAL MARKET
I would like
to discuss about few points in this discussion
1. US EQUITY
MARKET
2. TAPERING
TALK
3. IMPACT ON
US BOND MARKET
4. DAMAGE TO
ASSETS ACROSS THE GLOB
5. WHY
EMERGING MARKETS ARE IN MESS
6. WHATS GOING ON IN CHINA AND BRAZIL
DO YOU RECOGNIZE THIS PERSON?
HE IS MOST SECOND POWERFUL PERSON IN
THE WORLD RIGHT NOW. JUST GUESS I WILL REVISIT THIS SOME TIME LATER
1. US EQUITY MARKET
Do u
remember how this year started. We are now in the month of July and if we look
at the year 2013 first half of the year is over and if we do a little rewind
and go back and look at the issues that were confronting the market at the
start of 2013. Do you remember there was a term “FISCAL CLIFF” and I am sure many of u may now had even forgotten
about it and the amount of fear the fiscal cliff phrase was creating. The
Fiscal cliff was the combination of tax increases and spending cuts which lot
of people feared would push the US economy back to recession. But thankfully US
government acted on time and the
combination of fiscal cliff and the supportive steps from the US Fed helped the
US market and just have a look at the SP 500 CHART
The period
from sep – dec 2012 the SP was stalling at the level of 1460 but when the news
came the Fiscal cliff was getting resolved in Jan 2013 the s&p made a big
push and broke out above 1460 and if u see the first of 2013 it has been a nice
up trending chart and every time small corrections came it took support at 50
DMA and its only in the month of June SP500 has broken the 50 day moving
average and has sustained below it and till date it is trading below 50 dma which is kind of concern for the market and
technical traders are saying that the S&P will fall to 200 day moving
average of 1511.So even thought the first half of 2013 was great there is been
a fear that things may not be that good for at least few more weeks or months.
Generally the declines are fast and furious and may not be a prolonged one and
what ever deeper correction the market want to go through will go through in
very quick time. That’s the SP500 and if we want to come out with a fundamental
based on charts
IN THE FIRST HALF OF 2013 S&P 500 POSTED 12.6% RETURN WHICH IS THE
BEST SINCE 1998 DISPITE THE 1.5 % CORRECTION IN JUNE .QE WHICH HAS ACTING AS A
HEAD WIND FOR THE MARKET NOW MAY BE ACTING AS A TAIL WIND
2. WHAT IS THE TAPERING
TALK
Before I
talk that let me explain what is QE- QUANTITATIVE EASING
QUANTITATIVE EASY IS THE ANOTHER FORM
OF MONEY PRINTING
QE was
started by BAN BARNAKE at the peak of the financial crisis in 2008 and the idea
was to print money and use that money to buy bonds from the banks and then give
them cash. Now the banks will be flushed with cash because the bonds will be
moved to fed and that cash can be used by banks to lend out an it will boost
the economic activity and that’s how the economy can revive. US government did
QE1, then QE2 and in Sept 2012 they started the QE 3.What is QE 3. Every month
the fed will go out and buy 85 billion worth bonds in that 40 billion will be
mortgage bonds and 45 billion will be treasury bonds so that much money will go
to the banking system so it will kick start the economic activity. What
happened was that on may 22 the US FED CHAIRMAN MR. Ben Bernanke
in a testimony before the
congress said that economic growth is reviving so that the bond buying program
can be eased off ( ex you are going on an highway and your are taking your foot
from the accelerator not applying brakes) THAT
IS CALLED TAPERING JUST EASING OF BOND BUYING PROGRAM.
4.WHAT IS THE PROBLEM?
WHEN QE 3 STARTED THERE WAS NO END DATE. It was a
surprise for the market the QE 3 may end soon and another important thing for
the market is it always looks for THE DIRECTION
OF THE POLICY & SIGNAL TO THE MARKET. As now the market knows the QE
program is going to stop it starts it will start pricing in the impact of that
much in advance and as a result what happened was interest rates started to
rise. QE means banks will be flushed
with cash so the cost of money will go down but if QE ends cost of money starts
to move up and that get reflected in the rise of interest rates. The biggest
impact was seen on the bond market
10 years US TREASURY CHART
What you see above is 10 year yield chart If you
see the chart in OCT 2011 it was around
2.3 – 2.4 % it again peaked in April
2012 to same level and then got sold off
.Then just see in the month of June 2013 it broke out above that level right
now interest rates are hovering around 2.5 % .Technically there happened a large candle break out which
means interest rates have reset to a new level and it’s for real. One of the strong
points of US recovery is its housing market so the first thing that happened
was the interest rates on mortgages started moving up. The trends have started
and no one knows where its heading one thing is sure that the base rate will be
2.4% WHAT DOES THAT MEAN?
END OF BULL MARKET IN BONDS
WHILE UPDATING IT WAS 43 BILLION IN
JUNE BUT AS PER LATEST REPORTS BY JUNE END IT WAS 80 BILLION
When
interest rates raise price of bonds falls and yields go up which means the bull
market that going on in bond market came to an end. June recorded the highest
monthly outflows from the bond market about 80 billion in a single month that
was the kind of panic that was in bond market in US
CURRENCIES
US BOND YIELDS SET THE BENCH MARK FOR
THE COST OF MONEY AROUND THE WORLD
Europe
sovereign yields
Emerging
market Bonds
Emerging
market currencies
Gold which
yields nothing
You
look at ITALY, SPAIN, PORTUGAL the 10 year yields in last 2 months have risen
sharply which was hovering around 5 % and if they go above 6% they will not
even able to service their debt. These countries will just break apart. That’s the problem with risen
interest rates and that is why markets across the globe are so nervous
5. WHY EMERGING MARKETS ARE IN MESS
Chart of emerging market stocks
See the
chart and you can see 2013 started on an optimistic hope and see how it has
fallen and in last few weeks of June last it rallied but it definitely feels
it’s in terrible bear market .Look at the SP 500 its up by 12% and emerging
markets is down 10 %, you can see a out performance of S&P. There is a
reason you look at all emerging markets like china, Brazil, India, turkey all
are in terrible conditions
LETS TALK
ABOUT EMERGING MARKETS
NOW REMEMBER
AT THE BEGINNING OF THIS DISCUSSION I ASKED YOU TO GUESS ABOUT A PERSON. DO U
KNOW WHOM HE IS The President of the People's Republic of China Xi
Jinping
He is little
bit of low profile till now but he has started asserting his leadership which
is little bit different from previous one and he is giving a very serious message
to the Chinese public and economy we are moving away from GDP obsession to more
welfare and social and environmental indicators. Message is very clear that
Chinese government is no more interested in stimulus reckless lending and
credit expansion and move to slow and steady growth. The market pretty much
captured that when there was recently the Chinese shybor shot up by 12 % .What
puzzled many was the response of PEOPLE BANK OF CHINA which was very mute.
THE MESSAGE:
THE GOOD OLD RECKLESS CREDIT PRACTICES
ARE COMING TO AN END. BANKS SHOULD PULL BACK ON LENDING. One global fund manager told the best
way to play china is not to play at all
WHATS HAPPENING IN BRAZIL
CHART OF BRAZILAN INDEX
JUST SEE THE CHART ITS GOING ONE WAY DOWN
AND THERE IS A HUGE PROTEST GOING IN BRAZIL which is making people more
nervous you will be surprised to know
the trigger for the protest
JUST 10 CENT HIKE IN BUS FARE
PROTESTORS DON'T WANT FIFA WORLD CUP, OLYMPICS THEY
WANT SUCH HUGE FUNDS TO USE FOR HOSPITALS BETTER WAY OF LIVING THIS SOCIAL UNREST IS BECOMING A NEW PHENOMENA WORLDWIDE
My idea was
to go through the global markets in my next report I will be looking purely
into the global financial markets. Hope you find this article useful. Thanks
for your patience in reading this.
