World Bank cuts global economic growth Forecasts

Global growth should accelerate to 2.9 per cent this year from 2.4 per cent in 2015, the bank said, but that still represents a downgrade from its June forecast for 3.3 percent growth.

Among BRICS, India is the only one expected to see notable improvement in economic performance from 2015 – advancing at a 7.8 percent rate in 2016 versus 7.3 percent in 2015.

The U.S. economy should grow by 2.7 percent, down from an earlier estimate of 2.8 percent but up from 2015’s 2.5 percent.

world bank

Estimates for growth in the euro zone were trimmed by the same amount, to 1.7 percent from 1.8 percent previously, although that would mark a modest acceleration from 2015’s estimated 1.5 percent rate.

The bank forecast the Russian and Brazilian economies would continue to contract in 2016 rather than return to growth as it had estimated in its previous outlook in June.

China GDP growth was estimated to slow to 6.7 percent in 2016 from an estimated 6.9 percent in 2015. In June the bank had estimated 2016 growth of 7.0 percent.

In Brazil, GDP is forecast to decline by 2.5 percent in 2016 compared with an earlier estimate for growth of 1.1 percent, the World Bank said. The Brazilian economy likely contracted at a 3.7 percent rate in 2015.

History suggests the six months following a rate hike are better for Indian markets

Since 1983, the US Fed has raised rates six times, the last one being in 2004. For Indian markets, however, the last three – in 1994, 1999 and 2004 – are more relevant since foreign money data has been maintained by Sebi only from 1993 onwards.

The first hike, which could have impacted Indian, markets since 1993 was announced on February 4, 1994. BSE Sensex had rallied by 69% from 2,336 to 3,947 six months prior to the hike. In the next six months, the pace slowed to 8.3% touching levels of 4,276. But importantly FII inflows were positive in the six months following the rate hike.

The second rate hike started just before the dotcom bubble burst as the US government felt its economy was heating up. The Fed started increasing rates from June 30, 1999. Indian markets were warming up to the global rally with some help from participants like Ketan Parekh. From levels of 3060 Sensex touched 4144, a gain of 35% as the US Fed decided to hike rates. Indian markets continued to move higher, taking the rate hike in its stride and touched 5375, a gain of nearly 30% in the next six months.

FED RATE HIKE

FII flows were positive for all the six months prior to the hike and saw selling in three months after the hike. The month of July 1999, the very next month after the hike was a positive month for FII flows, but small levels of selling was witnessed in the following three months. The last two months saw good buying interest resulting in a strong positive figure for the six months following the rate hike.

The most recent hike was on June 30, 2004. Indian markets had fallen, thanks to a change in government after the popular Vajpayee government lost the mandate. Markets were trading 18 per cent lower from 5,915 levels at the start of the year to 4,874.

FII flows were negative in the month of May 2004, when election results were announced. Inflows trickled in for the next two months but zoomed higher in the final four months of the year. This resulted in market posting a sharp 28 per cent gain in the six month period following the hike.

As we head in for a likely scenario of a rate hike in mid-December 2015 Sensex is down by nearly 11% in the last six months. FIIs have been net sellers in four of the last six months with the total being a negative figure.

This scenario has not been witnessed in any of the earlier rate hikes as new players like ETFs and Hedge Funds are wary of the uncertain future. History however suggests the following six months of a rate hike are better.

How India Will be Impacted if US Hikes Rate for First Time

If the Fed hikes rates, some foreign investors are expected to book profit in their holdings in Indian shares and bonds; they will likely repatriate funds back to the US, where buying high interest rate bearing bonds will become an attractive bet.

The next two weeks will see a lot of high-volatility trading across financial markets. The ECB (European Central Bank) has come through with an easy money policy, which has, however, disappointed markets, which were hoping for even easier terms. The US Federal Reserve is expected to raise its policy rate for the first time in many years.

This divergent set of actions will impact forex rates. In turn that will alter trading patterns between countries, as the relative value of goods and services change. It might change the assessments of global GDP growth through the next financial year. The markets are already discounting such expectations.

The interest rate parity equation will also change in favour of a stronger dollar if the Fed does hike. The dollar (or any currency) plus interest yield in that currency should equal the euro (or any other currency) plus interest yield for a comparable instrument in the same time period. The interest yield rises on the dollar and it falls on the euro due to central bank actions. So, the dollar should get stronger to compensate.

FED-RATE

In the last two weeks of December and early January as well, we often see reduced trading volumes. People go on holiday and this is financial year-ending for many FIIs. Volume reductions often leads to higher volatility. In this instance, the volumes are likely to be higher but the volatility will also be higher.

The dollar/rupee movements and the impact on Indian stocks will probably be in line with moves in other markets. If the Fed hikes the rate, the rupee will fall. There will also be accelerated selling of Indian stocks (the FIIs are already net sellers of Indian equity in this financial year). If the Fed doesn’t hike, the dollar will harden and there will be some bullish impact on Indian stocks.

The impact of a rate hike in the US on India will be limited because of strong fundamentals
, In 2013, India saw $12 billion in outflows from May to September due to US rate hike worries. A record high current account deficit, double-digit inflation and record-low rupee led to large-scale destruction of shareholders’ wealth back then.

If Fed maintains status quo

If the Fed succumbs to market pressure and decides to not raise rates, global equity markets might rebound. If the Fed does not give a clear deadline or indication of when it wants to raise rates, we could see a bigger rally.

INDIAN MARKET CHEERS ON FED RATE DECISION

RBI may cut interest rates before next policy review

The Indian markets are likely to cheer the US Federal Reserve’s decision to hold rates at zero for more time. The benchmark Sensex could open gap up however the gains could be capped as the stock markets had largely priced in for a status quo by the US central bank.

fed new

Equity markets had assigned just 32 per cent probability for the first interest rate increase rise since 2006 by the Federal Reserve. And could have seen a drop had the Fed hiked interest rates, which could have sparked capital outflows from emerging markets like India into the developed markets

Market players believe that the Fed will wait until December to raise rates. Interest rates in the US have been near-zero since the 2008 global financial crisis. The low rates or easy money has seen riskier markets rally over the last few years

Meaning of the term Volatility Index ( VIX ) / Fear Index

Volatility Index (VIX) is a key measure of market expectations of near term volatility. As we understand, volatility implies the ability to change. Thus when the markets are highly volatile, market tends to move steeply up or down and during this time volatility index tends to rise. Volatility index declines when the markets become less volatile. VIX is sometimes also referred to as the Fear Index because as the volatility index (VIX) rises, one should become fearful or I would say careful as the markets can move steeply into any direction. Worldwide, VIX has become an indicator of how market practitioners think about volatility. Investors use it to gauge the market volatility and make their investment decisions.

NSE Volatility the VIX index has reached the level of 20 and above. Given that market experts are raising fears of a major correction in the coming days. So, traders need to be cautious before trading in the stock market .

What is the VIX indicator

VIX is the indicator that tells how many and what kind of market volatility. VIX level of below 20 is seen as stability to the market, while a figure above 20 indicates high volatility. NSE VIX is around 28.13 on 24th August. Nifty dropped 491 points on August 24 was closed when the VIX 17 was more than 28, Change in percentage is 64.36 % .

NSE VIX on today is 28.71 ,Nifty dropped nearly 200 points, Change in percentage is 16.76 %.

How does calculate VIX

The index of the current month and next month, calls and puts increase in average premiums and discounts are determined based on the movement of the VIX Index.

In India, value of Vix has been computed by the NSE since November 2007 based on the out-of-the-money (OTM) option prices of the Nifty. It has touched a high of 85.13 and a low of 13.04. As it is mentioned in percentages, value of Vix can never be below zero or more than 100.

Historical data indicates that India Vix has a strong negative correlation of negative 0.8 to the Nifty. This means that every time Vix falls, Nifty rises and every time it rises, it means that a fall is imminent. India Vix touched a value of 85 percent, a few days before Nifty touched a bottom post the Lehman Crisis.

India Vix has a mean of 26.65 and a median of 23.83, these figures are important for option writers and traders since Vix has a tendency to revert to the mean.

india vix

What experts say

• Market experts say that the decline in the short term and could deepen. Accordingly, the index that measures the technical charts show that in the short term Nifty breaks below 7800 is visible. So investors should include in their portfolio of IT and pharma stocks because these stocks have always considered defensive. The sharp fall in the stock market during the staying and they usually do not see a sharp decline.

• VIX is raising fears of a sharp fall in the growth markets. Also forthcoming credit policy of RBI traders in the market are hedge their positions. IT and FMCG purchases are seeing right now, it is pointed out that foreign investors out of stocks aggressive positions are shifted to defensive stocks. This large decline in the market because the market will not go out of the money from one sector to another sector is shifting.
On fears of market volatility VIX rises.

• Find VIX moves from the fact that, before the 2014 general election results was a risk of large fluctuations in the market, the VIX was at the level of 40. August was a VIX level of 13.53, which is now approaching the level of 24. From this perspective, it is faster to 43.65 per cent. The Sensex and Nifty have broken more than 4 per cent in August. This situation indicates that the current correction in the market index (fall) could see.

VIX-year upper level

• Nifty and Sensex 4.5 per cent this year has broken. Smallcap index has declined two per cent. However, Vix has climbed 43 percent in the past month, and this year are trading close to the upper levels. Vix shows that short-term risk.

China slowdown is a big positive for India

Indian fundamentals are much better than the Chinese fundamentals and the outlook for India over the next few years is even better in terms of growth which could easily surpass that of China in next 2 years.

Prime Minister Narendra Modi wants India to become a $20 trillion economy in the future and much of the emphasis by government is now moving towards pushing growth-focused reforms to revive investment cycle and push GDP growth to 7-8 per cent in the next 24 months.

India is projected to grow at 6.3 per cent in 2015 and 6.5 per cent in 2016, when it is likely to cross China’s projected growth rate of 6.3 per cent, the IMF has said.

FIIs could prefer India over other emerging markets due to moderate valuation, stable government and positive economic outlook. The business friendly policies of the new government would keep the sentiments positive towards India.

china-watch-1-1_3280773b

As per Mr. Nilesh shah The world is worried that China is slowing down. China is devaluing their currency to get an edge for their exports. They can do a replay of 1997 Asian crisis on a much larger scale.

The reality is that most of the other EM currency has dropped more than Renminbi. Today’s China cannot do a devaluation of the scale with which it got away in Mid 90s.

China slowdown is a big positive for India as it pushes more investor’s to look at an alternate model of balanced growth rather than credit led growth. China’s credit to GDP Ratio is more than two times that of India.

US dollar is appreciating against most EM currencies and is putting pressure on US growth and exports. US Fed will be compelled to keep dollar strength in mind while looking to raise Fed rates. US 10 year yield is indicating the same at below 2% after a long gap. Slower rise in US Fed rates will help India to cut interest rates and attract capital flows.

There is a worry that with oil prices dropping below USD 40 world is moving in to recession or slower growth. Actually India is a large importer of commodity. We import 1.4 billion barrel of oil on a gross basis. Every USD 1 drop in oil price helps us save about USD 800 plus million in import bill. Today with oil dropping below USD 40 our incremental saving will be close to USD 16 billion plus since June 2015 high of oil prices. India is a beneficiary of dropping oil and commodity prices.

The government, unlike in the past has used oil price dividend of more than USD 60 billion to clear fiscal mess.

Currently, India is having good macro fundamentals. Even with increased government spending, the fiscal deficit is under check at below 4%. CAD is under control. Inflation is under control with WPI at negative level for last nine months and CPI at 3.8% is below RBIs target level. Indian interest rates are at a level where they can be cut to support growth. IIP growth is recovering. Benefit of improved government spending is yet to fully percolate to economy.Worlds largest fund epfo to start investment in equity.

Correction in most global markets is driven by local factors. For e.g. Chinese markets are down as they have run up significantly in last 18 months. Russia and Brazil are down due to commodity based nature of their markets. NASDAQ is down as valuation of some of their Tech Cos are showing excesses like 2000 technology boom and bust.

In summary .

Global volatility is here to stay for some time

Drop in commodity price is negative for few EMs like Russia and Brazil but hugely beneficial to a country like India

FII selling is led by oil nation’s sovereign funds, GEM funds and ETFs. It is likely to continue for a while

Domestic participation will determine the extent of drop and speed of recovery in Indian markets

We are more likely to see a U-shape recovery than a V-shape recovery as FY17 corporate earnings recovery will support markets.

Provident Fund participation can also provide additional support.

In the short term it will be futile to predict bottom of the market.

Central Banks around the world will swing into action to support markets sooner than later. Their coordinated action will soothe global volatility.

http://fpindia.in/blog/indias-gdp-reach-to-8-by-2017-world-bank/

http://fpindia.in/blog/worlds-largest-fund-epfo-to-start-equity-investment/

Japan’s Nikkei Hits More Than 18-Year High

Japan’s Nikkei Hits More Than 18-Year High ( Highest since December 1996 )

Japan shares have had a steady run since October. Support has come from buying by the government’s huge pension fund, a weaker Japanese yen and buying by foreigners.
Local investors are also more interested in equities as Japanese bonds are returning low yields.

japan nikki

NIKKEI 20,868.03 up 58.61 (0.28%)

1 US Dollar = 124.03 Japanese Yen

1 Indian Rupee = 1.95 Japanese Yen

The BoJ is buying government debt at an annual pace of about Y80tn, suppressing yields and thus encouraging funds to move into riskier assets like shares.

Japanese shares — exporters, in particular — have been buoyed by the weakening yen, which earlier this month fell to its lowest against the US dollar in 13 years amid the Bank of Japan’s quantitative easing programme.

Chinese markets (Shanghai Composite Index) lost 6.5 %

Chinese stock markets (Shanghai Composite Index) lost 6.5 %

China stocks fall on margin tightening, IPO wave, weigh on Hong Kong.

Surging Shanghai Composite Index is a stocks a bubble as per Chinese strategist Patrick Chovanec said , There’s a “total disconnect” between this year’s strength in Shanghai stocks and the slowing Chinese economy.
Most sectors were down in China, with financial shares and real estate stocks leading the decline.

Shanghai Composite 4620.27 ( -321.44 ) ( -6.50 %)

Hang Seng 27454.31 ( -626.90 ) ( -2.23% )

As a growing number of brokerages tightened requirements on margin financing – an important engine behind a red-hot rally that has made Chinese share markets the best performers in the world.

woman-watches-shanghai-composite-index-computer-screen-shanghai

The fall was also triggered by some profit-taking ahead of a new flood of initial public offerings (IPO) next week, which some analysts estimate could freeze up around 5 trillion yuan ($807 billion) of liquidity.

In Hong Kong, Milan Station Holdings shares bounded about 4 percent after slumping 46 percent during the
previous session. The company said it was not aware of any reasons for the share price tumble.