End to stimulus in the offing?

While it is always possible that the Fed and the Chinese government could continue to inject money into the system, there are very good reasons why they might refrain. An uncoordinated tightening by the worlds' two largest economies appears to be a definite possibility, which may have very unfortunate consequences

Since the beginning of the recession monetary policy around the world has been very similar: the more money the better. Without any particular agreement the US, Japan, Eurozone and China have all been flooding their economies with stimulus. This may soon change.


As I wrote last week, the Federal Reserve has been considering tapering since May. Until recently most market pundits have predicting that put the beginning of the taper off would not occur until next March. The Fed and Janet Yellen have specifically stated on many occasions that the beginning of the taper will be data dependent, and the data has been rather good. The numbers definitely puts the probability of a taper closer perhaps December or January. The best indication of an earlier taper is the yield on the 10 year US Treasury note. It reached a high of 2.97% at the beginning of September only to fall back to 2.48% a month later. Since then it has been rising. It is now up to 2.86% a level not seen since the Fed declined to taper in September. The jobs report and the unemployment numbers were also very good and within what the Fed once described as its goal for ending quantitative easing (QE).


The Fed constantly tries to remind the markets that a taper is not tightening. Certainly the bond buying program will go on for months after the taper starts. It might even change to the purchase of short term two and three year notes as the Fed policy changes. In fact unlike the 10-year, the rates on the shorter term notes have declined over the past few weeks. Still as it did in June any taper is likely to have an impact on overheated global markets.


A rate increase by the Fed would be bad enough, but it might get worse. Apparently the Chinese are also tightening. The process is far from transparent, but there is no doubt that recently interest rates in China have been going up. The yield on the government 10-year is at 4.6% the highest since 2008. The Chinese government recently auctioned $3.3 billion worth of 50 year bonds at a yield of 5.31% the highest since 2009 and over a hundred basis points above the yield in the last auction. The seven day repo rate rose 25 basis points. Last month money market rates jumped to their highest level since June when the People’s Bank of China (PBOC) drained a net 15 billion yuan ($2.4 billion) from the system.


While it is always possible that the Fed and the Chinese government could continue to inject money into the system, there are very good reasons why they might refrain. Recently there has been a lot written about bubbles. This is really beside the point. It is always difficult to determine a bubble. It is not hard to determine risk. The Federal Reserve has been clear about this. They wanted to encourage risk. Sure enough if you flood the world with money, a lot of it will be lent to people who might not pay it back. The Fed and the PBOC may not worry about bubbles, but I am sure they are concerned with excessive risk and there is a lot of that.


The record stock market is just one indication in the US. There are many others. They include mREITs, which I discussed in my last piece, plus record issuance of securitized assets, so called cov-lite loans, a record margin debt and a new record for the issuance of triple C rated junk bonds. Janet Yellen and her colleagues are concerned about unemployment, but they are also concerned about excessive risk as illustrated by Fed Governor Jeremy Stein famous speech last February.


The concerns of the Fed are small compared to those of China. No one knows exactly, but the best guesses place Chinese municipal authorities’ debt at 9.7 trillion yuan ($1.6 trillion) or 14% of all loans. According to a November report by Moody’s only 53 percent of the 388 municipalities had enough cash to cover debt payments and interest this year without refinancing.


Much of the money for municipalities and real estate development was raised through the Chinese shadow banking system. The size of the credit in this system has exploded. It grew by roughly 14 trillion yuan ($2.3 trillion) in the first 10 months of 2013. Nearly half of all new credit creation is from non-bank institutions.


China’s banking system is more dependent on regulations than market interest rates. This is supposed to change, but until it does, the PBOC is also tightening by changing the rules. In a regulatory move that will help dry up credit, the PBOC has placed new limits on interbank lending. Interbank lending exploded because it has allowed banks to avoid regulator limits. Interbank assets have increased 140% over the past three years and has more than tripled for mid tier banks. The new rules could reduce the tier one capital by 1% and lending by 5%.


Recently when either the Chinese or the Fed either started to tighten or even hint that they would soon pull back, there was an immediate strong reaction. Not just in the US and China, but also in the emerging markets. This reaction might have sapped their resolve. However the markets did not learn any lessons from the temporary pull backs. When stimulus was resumed or tightening no longer threatened, the speculation resumed with a vengeance.


While neither the Fed nor the Chinese seem concerned about bubbles, they surely are not blind to the unintended consequences of their actions. Janet Yellen has even complained about the Fed as a prisoner of its own policies. So an end to stimulus seems definitely in the offing.


Perhaps either the Chinese or the Fed might be able to slow down their stimulus programs without a crash, but it appears though that they might be doing it at the same time. Since neither institution has been particularly good at revealing their intentions, it is not only the market that is in the dark. Both institutions are not totally cognizant about the other’s intent. So an uncoordinated tightening by the worlds’ two largest economies appears to be a definite possibility, which may have very unfortunate consequences.


(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)


Nifty, Sensex still on an uptrend

Nifty is on an uptrend which will be threatened only if it breaks 6,150

For the second week the indices finished positive. There are not too many sellers which is why the price is drifting higher. However, bulls lack conviction too. Even on Thursday, when many were expecting markets to finish strong on the back of possible BJP sweep in four key states, the markets gave up significant gains as the day progressed. Friday’s mildly positive session underscores an otherwise indifferent week. The BSE Sensex finished the week at 20,996, up 204 points, or 1%. The NSE Nifty finished at 6,259, up 83 points, or 1%. 


On Monday, Nifty and Sensex opened marginally up on positive cues like better GDP data, improved PMI figures in Europe and China and end to the sugar industry impasse. But later during the day, gains were given up. The HSBC survey showed Indian manufacturing returned to growth last month as a strong rise in orders pushed factories to step up production.


The markets traded weak on Tuesday, and trended down throughout the day because of positive manufacturing data from US released on Monday that strengthened case for tapering. Also, Crisil had forecasted Indian current account deficit would widen by FY14, even though it has been reducing (thanks to restraint in imports and a strong rupee).


Losses from Tuesday extended into Wednesday especially on the news that the information technology sector, despite weak rupee, is having difficulty in hiring people with Reuters saying that hiring is on “ice”. Thursday was off to a spectacular start as possible BJP sweep in four key states filtered in. However, much of the gains were given away when the markets closed at the end of the day. Market breadth was uninspiring, with advance-decline ratio nearly one. The rupee hit a 5-month high while the 10-year government bond yield remained largely flat. All global markets were also rolling over.


On Friday, stock markets ended went down after a relatively strong first hour, and finished where it started. This is the fourth straight day that the markets saw initial gains erode through the trading session.

Among the other indices on the NSE, the top two indices were CNX Banks (5%) and CNX PSU (4%) while the top two losers were CNX FMCG (-3%) and CNX MNC (-1%).


Among the Nifty stocks, the top five gainers were Tata Power (12%); Axis Bank (11%); PNB (10%); Jindal Steel (10%) and BHEL (10%), while the top five losers were Hindustan Unilever (-6%); ITC (-3%); Dr Reddy (-2%); Tata Motors(-2%) and Hindalco (-2%).


Top ML sectors


Worst ML sectors




Consumer Products




Oil & Gas


Infrastructure - EPC


Non-Ferrous Metals




Farm & Farm Inputs









Suiketu Shah

4 years ago

If Modi gets 4/4 Sunday,Sensex shd rise quite a bit Monday


4 years ago

The capex biggies like L&T and BHEL have substantially appreciated in the recent past with investors wealth being increased by 30% to 50% in short time.
Praj Industries another quality share in this category,have been showing continued higher tops and higher bottoms. Volume increase also shows investor interest multiplied exponentially.
Appears soon this can cross the 52 week high , the momentum shows this can possible happen in next couple of weeks.

But this is a volatile share and if you are trading stoploss is a must, if for investing one can start accumulations when there are small and shallow corrections happen.
Sugar price plummeting globally could be bad news for sugar producers, however Ethanol plant producer like Praj industries will show high performance and export also will be really handsome and another plus point for this company the darling of some of the bulls, due to US$ being 15% higher than last year Q3 ( oct to December quarter), can also bring in large benefits to the bottom line. The exports also will be at its peak during this quarter as This quarter is the year end for most of the western countries to which Praj industries exports their ethanol plants.
Hence Investors should surely hold this share after investing till the quarter results will get announced sometime during end of Jan 2014.
It also appears to be a Multibagger for the year 2014 having heavily corrected in the last 2-3 years. This also is a consistent dividend paying company and Dividend yield also is close to 4%

Nifty, Sensex shoot up but upside limited: Thursday closing report

After declining for two days, the stock markets shot up on expectations of BJP’s victory in Assembly elections but the upside for the index is limited

On Wednesday, we suggested that while the index has given up some gains, the uptrend is not under threat. On Thursday, the stock markets were upbeat with BSE Sensex rallying over 21,000, mainly on political news of a likely clear mandate for BJP in three out of the five assembly elections. However, while the indices looked strong, it gave a substantial part of the gain. Besides, market breadth was terrible (with advance-decline ratio almost one). The rupee hit a 5-month high while the 10-year government bond yield remains largely flat. All global markets are also rolling over.


The BSE Sensex stock market index opened up at 20,992, hit an intra-day high of 21,165 and then trended down to an intra-day low of 20,929 before closing at 20,957 (up 249 points or 1.20%). Similarly, Nifty stock market index opened up at 6,262, then hit an intra-day high of 6,241 then trended down to hit an intra-day low of 6,232 before closing at 6,241 (up 80 points, or 1.30%).


By and large, all stock market indices were seen trending up except for media, IT, FMCG and pharmaceuticals which were down 2.09%, 0.47%, 1.04% and 1.31% respectively.


Of the 50 stocks on the Nifty, 34 advanced and 16 declined. The top gainers were IDFC (6.78%); ICICI Bank (6.63%); HDFC Bank (4.62%); L&T (4.60%) and BHEL (4.19%). The top losers were Sun Pharmaceuticals (-2.43%); Dr Reddy (-1.61%); Lupin (-1.41%); ITC (-1.33%); Hindustan Unilever (-1.22%).


The government has deferred the decision on issuing banking licenses until March next year, citing that many of the license applicants have “complex” structures. The United States Federal Reserve said that it saw stronger manufacturing during October to mid-November and sees “modest to moderate” growth in the US economy. The US trade deficit shrank 5.4% in October to $40.6 billion. The US November non-manufacturing index (i.e. service sector) fell to 53.9 from 55.4 in October. The US markets sold off during the day but recovered impressively to end slightly lower. The Nasdaq was flat while S&P 500 was down 0.12% and Dow down 0.15%. US stock futures were seen trading flat ahead of Thursday trading in US. Interestingly, yesterday, the US 10-year bond yield ht 2.85% even without any hint of inflation and tapering.


In Asia Nikkei finished weak dipping 1.50% as Yen strengthened. Hang Seng and Shanghai were flat while Singapore was down 1%.


Meanwhile, in Europe, the Spanish 5-year notes are currently yielding 2.72%, the lowest since July 2005, indicating recovery in progress. Spain’s IBEX index was up 0.35%. However, all European investors’ eyes are on ECB and BOE decisions are due today on monetary policy. European stock markets were flat.


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