Friday, December 11, 2009

Global Economic Factors

The Global Backdrop:

US Dollar
Currency markets have been pretty volatile right through 2009, with the Dollex (US$ Index) moving up from a level of 79 in mid-Jan to a level of 89 by March’09 and then moving down steadily to a level of 75 till last Friday. The 50 DMA currently lies at 76 while the Dollex is at 75.72. An attempted breakthrough from its 50 DMA gave the US$ some strength for a couple of days, but, proved short lived. Currently the Dollex is struggling to break through 76 convincingly, which can give strength to the US$, while a fall through 74.5 levels might quickly take it to 71 levels. Watch the Dollar, as its strength will bring down markets & commodities, while a Dollar weakness will give markets the strength to breakout of their current range bound scenario.

With the Fed having pumped in at least US$ 1.7 trillion on several bail-out packages and Governments all over having followed suit with varying amounts, there are plenty of funds in the markets chasing a limited number of assets, leading to what is commonly being referred to as the asset bubble.

Interest Rates
With the Fed having brought down interest rates to near zero levels, the weak US Dollar is also chasing assets that can provide returns over the short term. As such since the fall in the Dollex starting March ’09 stock markets globally have been attracting a lot of investment and have all turned in phenomenal returns in excess of 50% till date already. Considerable funds have also flowed into emerging markets and commodities.

With the flow of excess liquidity in global markets, commodities have risen sharply, even though industrial recovery and consumption have yet to turn up significantly. Crude on the other hand after a quick recovery from US$35 to US$ 82 per barrel levels, has lost ground and currently is struggling at US$ 70 per barrel owing to slack demand and an inventory build-up in western markets. Metals and bullion (Gold & Silver) have however commanded centre-stage in the commodity price rise. If industrial production & consumption does not pick up any further (which is a strong possibility), base metal prices may soon run out of steam. Gold & silver, however, continue to look attractive both as investment and insurance in a period when fiat currencies continue to get printed at will. Also, several Central Banks including the RBI clearly intend to bolster their gold reserves, in order to protect their currencies from further devaluation.

GDP Growth
India surprised the world with its 7.9% GDP growth rate for its Second quarter (July-September ’09) announced a week ago. The US is trying to tell the world that it is out of its recession (a fact that it did not concede till 6 months after it was in one). Australia & Norway have started increasing interest rates - a message that their woes are now a thing of the past. China’s jugglery of figures and balance sheets continues, as it continues to give messages to those within & outside that all is well. The question here is that once the interest rates are raised & liquidity pulled out of the system, will there still be any real growth? Guess we need to wait another two quarters (at least) before we are clear that we are not in for any unpleasant surprises again.

Excess liquidity has got the inflation monster rising again. Unfortunately, with the masses having lost a record number of jobs and a majority of their savings (apart from homes) in the recent crash, this is not the time any Government would like to battle inflation. The Food Index has shot up dramatically since 2007 even though the WPI and CPI are not looking alarming, as yet. The interesting thing to note in all this is that the very same liquidity and low interest rates that help industrial recovery work against inflation. So, if inflation is to be controlled, then industrial recovery will have to be put on the back-burner for a while.

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