The Fed’s Decision on Interest Rates

At their meeting over 20 – 21 September, the FOMC (Federal Open Market Committee) voted 7 – 3 to leave interest rates unchanged. It remains tentative whether the Fed will raise rates in December, which is the next targeted deadline. Yellen could have voted either way, but “in a close call, like several others, she leaned toward staying on hold for now”, said Perli at Cornerstone Macro.

When will the next rate hike be?

Goldman Sachs analysts saw the 151,000 jobs added in August as sufficient to boost the chances of the Fed taking action during its 20 – 21 September meeting to 55%. Morgan Stanley Strategists however, say they are staying bullish on government bonds because of the continued slack in the U.S. labour market in addition to the absence of inflationary pressures which will stay the central bank’s hand.

“Our Fed call has remained resilient in the face of inevitable hawkish chatter that, just like hope, springs eternal” Hornbach and his colleagues wrote in a 2 September note to clients. “Our U.S. economists still expect the Fed to remain on hold through 2017”.

Goldman has been warning since at least February that traders weren’t prepared for how far the Fed would raise rates and that Treasury yields were poised to climb. By contrast, Morgan Stanley called 2016 the “Year of the Bull” for bonds in a March report.

 

Stay focussed on China’s nominal growth

Some experts are saying : Forget what everyone says. Don’t talk about China in terms of real growth, because it is not a good indicator of China’s GDP. They say focus on nominal growth because growing GDP might more accurately a rise in inflation as opposed to the growth of the amount of goods and services produced.

 

Of Gold and Gemstones

As the world economy goes through a roller coaster ride with terrorist attacks all over, then Brexit, then negative interest rates in Japan and with the U.S. presidential elections just over the horizon, people want something safe, predictable and tangible.

There has been a flight to safety in the form of actual gold and gemstones. Physical gold, silver and gems stored in vaults and safe deposit boxes of Malca-Amit in Singapore have jumped close to 90 percent in the past year.

There are some who are not sure prices will keep rising, as we see more increases in U.S. borrowing costs which will lift the greenback and tarnish a metal that pays no interest. And the probability of 3 rate hikes from now through end 2017 means there is little room for rallies. All this is according to Luc Luyet, a currencies strategist at Pictet Wealth Management. However, Goldman Sachs Group Inc. likes gold as a strategic hedge – its base price is $1300 per ounce, which is less than the $1340 traded on Tuesday.

People in Asia have always invested in gold, according to Kohelet. And Asia is where more than half the world’s bullion is consumed. “If you take China and India [the two countries with the largest populations] it’s part of the culture and tradition to put some aside,” he said.

 

 

Just a precaution to the trigger happy person who goes and dumps his entire life savings into gold, silver or gemstones: the volatility of such commodities is very high, and knowing when to enter and when to exit is of utmost importance. How many can claim to be able to predict the movement of these commodities and come out big winners? So if even the experts can get it wrong, what more the layman investor?

What’s happening in India?

Urjit Patel is the new governor of the Royal Bank of India (RBI), and he has some heavy responsibilities to bear and a very large pair of shoes to fill. He is not unqualified, however, what happens in and to India will depend on how well he stands up to pressure from the Indian government.

RBI’s main job is to control inflation.With consumer prices rising close to the top of RBI’s target range of 2 to 6% s a year, Patel concludes that there is no scope for lower interest rates.

In the agricultural area, there are food shortages caused by poor rural infrastructure, assorted supply side bottlenecks and government incentives that encourage farmers to plant unsuitable crops.Hence there is an upward pressure on food prices.

The government has implemented a new national goods-and-service tax. This would do the country well. They also are going to privatise inefficient state companies and this will raise money and enable the economy to be more productive. They will also focus on state-owned banks which are responsible for 70% of lending. By doing this, they will free up resources to recapitalise banks with stronger foundations.

In conclusion, it is crucial that the Indian government stays independent from the RBI.

 

 

 

One Belt One Road

As we all know, China is attempting to rebuild the Silk Road in hopes to boost the economy and ease the flow of exports and imports. The Silk Road is China’s attempt at  developing China into a regional superpower and challenge decades of US’s dominance in Asia.

One interesting thing to note is that the sea route passes by Singapore.

Why Singapore? Some might ask. Well, many countries in Southeast Asia are becoming increasingly wary when dealing with Chinese companies, which have a rather bad track record in implementing deals over the last ten years or so. Hence China could be looking to Singapore to help smooth over the territorial frictions it has with some Southeast Asian nations.

Chinese Companies are not sowing back into the Economy

Chinese companies are loaded with cheap cash. The problem is they are not spending it. This is frustrating policy makers who made a lot of effort to introduce liquidity into the Chinese market. However, Chinese companies are not willing to invest, and would rather keep their money in the banks. They are not opening new plants, neither are they hiring new staff. It’s the proverbial hiding your money under the pillow scenario playing out at present.

This will affect China’s already slowing economic growth.

Problems with the US Bond Market

Central Banking policy has had an extraordinary impact on the US corporate bond market. The current corporate debt in the US stands at a staggering $8.5 trillion; almost double of the amount 10 years ago. As US corporations continue to make use of large amounts of debt to finance themselves, the US corporate bond market slowly assumes the position of being the most systematically important market in the US financial system.

Trading activity in the secondary bond market is stagnating in the face of continuing growth, and this is heightening concerns of market liquidity.

In short, the US corporate bond market has not evolved to keep up with the times and an analysis done showed that it is 40 years behind the times.

 

 

How can Brexit be positive?

Since that fateful day, there have been many doom and gloom forecasts for Britain. Some say they will not be able to trade as freely as when they were in the EU (European Union), others say it’s just bad for Britain, perhaps without even knowing why. Boris Johnson on the other hand sees a very positive possibility for Britain.

Mr Johnson said it was “overwhelmingly in the economic interests of the other EU countries to do a free-trade deal, with zero tariffs and quotas, while we extricate ourselves from the EU law-making system”.

Some facts are that the global stock market has not plunged tremendously as it was predicted to, the FTSE is higher than when the vote took place, and there has been no emergency budget activated.

Britain now can do free trade deals with many countries in the world, many of which are already applying. And she can supply Europe in leadership on security and other areas but at a purely intergovernmental level.

Britain’s future may shine brighter yet.

Indonesia Passes Tax Amnesty

Sovereign bonds in Southeast Asia’s largest economy just received an extra boost as Indonesian law-makers passed a tax amnesty forecast to invite 560 trillion rupiah ($42 million) back into the Indonesian economy.

Indonesia is strongly driven by domestic consumption and this has proven to be the way to go (even China is trying to reshape its economy to be one of domestic consumption).

“With the anticipation for all those inflows the rupiah will remain supported so that allows investors to invest in Indonesia’s bonds comfortably,” said Ezra Nazula, who helps manage $4 billion as head of fixed income at PT Manulife Aset Manajemen Indonesia in Jakarta.

There is also a possibility that S&P which gave Indonesia a junk rating in June may upgrade her status in October or November.