Monday, October 29, 2012

Yen Off Recent Lows, Euro Still Waiting On Spain


The Japanese Yen got off last week's lows at the start of the trading week, as investors looked beyond the Bank of Japan's expected easing steps and instead focused on US economic factors.

The Yen continued to advance against the Euro earlier today, ahead of key reports that are due out on Tuesday.

Data is expected to show that Spain's gross domestic product has shrunk by around 0.4% last quarter and that Germany's jobless rate has risen 6.9% in October from September, its highest level in more than three years.

Other data due out on Friday, could also show that U.S. unemployment has climbed in October. I expect that the U.S. jobless rate will have climbed to around 7.9% for the month.

With especially the Euro region's economy being as bad as it is and with no sign of picking up, I expect there to be appreciation pressure on the Yen for the moment.

The markets will shift their attention onto the Bank of Japan (BOJ) which is scheduled to meet on Tuesday. Expectations are high for an announcement to confirm any easing policy.

Government data had last week shown, that consumer prices had fallen for a fifth consecutive month. This has made the central bank's 1% inflation target elusive.

As a result, the BOJ board members are now facing political pressure to ease policy and I expect that we could see officials boosting asset purchases on Tuesday. Should that occur, I then expect that the Yen may momentarily weaken.

Earlier today, the Yen was at 79.74 per U.S. Dollar and at 103.08 per Euro.

Meanwhile, investors still await Spain's request for a bailout, which would kick-start the European Central Bank bond-buying programme and could force the Euro out of its recent range

Now European policy makers are anxious for the release of a report on Greece's progress in meeting internationally agreed targets. These targets were compiled by the troika of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF).

The Euro was down by 0.1% to $1.2927 earlier today.

From the U.S comes news that the New York Stock Exchange and New York Mercantile Exchange have cancelled floor trading for the day. The Securities Industry and Financial Markets Association had suggested that trading end at noon New York time today, because of imminent Hurricane Sandy
 
Diwali 2012 is just a couple of weeks away. Traditionally, this has been the season for buying gold. We thought it would be interesting to see how gold prices have appreciated over a decade. Today's chart of the day shows the return on gold from one Diwali to the next in rupee terms. Had you invested in gold every year since Diwali 2001, you would have made enormous gains on all your gold investments. The total gains would have been about 670%. So, should you buy gold even after it has risen so substantially? Being a keeper of value, gold tends to act as a hedge against currency devaluation and negative real interest rates. At a time when central banks across the world are recklessly devaluing the ir currencies, gold has retained its status as a safe haven. As such, we believe that gold should account for about 10-15% of a person's investment portfolio. 

Sunday, October 28, 2012

Japan remains mired in deflation.

 Japanese CPI fell 0.1% on year in September vs consensus of -0.2%, with the continued deflation increasing the pressure - not least from the government - on the Bank of Japan to announce further easing in a policy meeting next week. "the BOJ will top up its asset-buying program by 10T ($125B) yen."

Woe deepens in Spain's job market.

 Spanish unemployment rose to a new record high of 25% in Q3 from 24.6% in Q2 and vs consensus of 25.1%. The trend was exacerbated by labor reform making it easier to fire workers

World's spare oil capacity rises, but so do Iranian exports.

Global spare oil output capacity excluding Iranian production rose to 2M bpd in Sep-Oct from 1.8M bpd in the previous two months, Reuters reports, citing EIA estimates. The latest level is historically low but does give Western powers room to continue squeezing Iran over its nuclear program. Despite that pressure, though, preliminary data shows that Iranian crude exports have slightly increased since July.

U.S. set to overtake Saudi Arabia in oil output in eight years.

2020 - that’s the year U.S. oil production will overtake Saudi Arabia if current rates of production growth hold steady. U.S. output is on track to surge 7% this year, to 10.9M bps - the biggest one-year gain in over 60 years. The production turnaround is pushing down imports, too: today, the U.S. imports just over 40% of its oil, the smallest share in 20 years

U.K. exits double-dip recession.

The U.K. economy grew a greater-than-expected 1% on quarter in Q3, representing the fastest growth in five years and signalling the end of the country's recession after nine months. Growth was boosted by the London Olympics and the loss of a workday in Q2 - which effects the Q/Q comparison - due to the Queen's jubilee celebrations. Q4 figures may therefore provide a better idea of the underlying picture.

Wednesday, October 24, 2012

Dollar Up To 3-Month High, Yen Down In The Dumps


The US Dollar rose close to a 3-month high versus the Japanese Yen on Wednesday, supported by hopes of further Bank of Japan monetary easing.

The Japanese Yen has been in retreat mode over the last few weeks with growing market expectations that the BOJ will unveil further monetary stimulus at its policy meeting next week.

Meanwhile, the Euro remained rooted to a 1-week low, bearing the brunt of disappointing earnings from US based firms.
 

Eurozone economic gloom deepens.

 Eurozone flash manufacturing PMI fell to 45.3 in October from 46.1 in September, with activity in Germany declining sharply. While eurozone GDP may drop modestly in Q3, "a steeper fall looks to be on the cards" in Q4, said Markit. "Sentiment about prospects for the year ahead are now the gloomiest since early-2009, when the post-Lehman Brothers crisis was in full swing

Monday, October 22, 2012

Euro Takes A Step Up, Yen Remains On The Back Foot

The Euro took a step up during the Euro session on Monday after the Spanish prime minister received a big boost for his austerity drive with a regional election victory.

The Euro was in a downward spiral over the last few days last week when Spain made no attempt to seek financial aid at the European Union summit.

Meanwhile the Japanese Yen fell to a 2-month low against the US Dollar on the back of expectations that more stimulus is due from the Bank of Japan.

Today, we are seeing the market acting on the assumption that the BOJ will introduce additional stimulus. This is hurting the Yen and putting upward pressure on the Dollar.

Japan's Finance Ministry has announced that the country's shipments are down by 10.3% in September from a year ago. The trade deficit is 558.6 billion Yen ($7 billion).

The decline was steeper than many economists had predicted and the largest since May 2011, a couple of months after a magnitude-9 quake struck Japan's northeast and in turn then triggered a tsunami and a nuclear disaster.

The BOJ is also expected to lower its economic projections for the 2012 and 2013 fiscal years. It is due to release its first set of forecasts for 2014 at a policy board meeting at month end.
A widening trade deficit will serve to remind the Japanese, of a shrinking current account surplus and what I think will then result, is some short term Yen selling.

When compared with the U.S. the economies in Europe And Japan are looking continuously bleaker, and this should serve the Dollar well in the near to medium term.

The Yen earlier today was down by 0.3% to 79.58 per Dollar and depreciated by 0.6% to 103.87 per Euro. The Euro was up by 0.2% to $1.3054.
On Friday last, European leaders at a European Union summit held in Brussels, committed to agreeing by the end of 2012 on a legislative framework for a single bank supervisory mechanism. Interestingly Moody's Investors Service have said that this would be rating's negative for weaker nations.

The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the U.S. Dollar against currencies of six U.S. trading partners, stood at 79.521 and so has maintained a two-day gain following stock losses globally, which have increased the allure of haven assets.

Japanese exports sink 10.3%.

Japanese exports slumped 10.3% on year in September vs consensus of -9.6% for the biggest drop since May 2011. Imports rose 4.1%, beating expectations, but the country recorded a trade deficit of ¥558.6B, its first September shortfall since 1979. Exports to China plummeted 14.1% as the East China Sea islands row took its toll, while sales to the EU collapsed 21.1%. U.S. exports rose 0.9%, but that was way down from +10.3% in August.

German economy may have grown in Q3.

 Germany's economy probably expanded in Q3, helped by growth in industrial production and strong exports, especially to outside the EU, the finance ministry said in its monthly report. The economic growth came despite the weak global background and analysts forecasting contraction, although the ministry did warn of a softening in Q4.

With QE3,the demand for Gold and Gold ETFs increased

Gold is considered a currency that cannot be manipulated by interest rate policies of any one government. It has traditionally been an asset class used as a hedge against inflation. And therefore is considered to be a safe haven during times of uncertainty, such as the present. This simple logic is leading many investors to invest in gold mutual fund and ETFs

With inflation pretty much on the cards - following the recently announced QE3 plan - and the uncertain global economic environment - with Asia slowing and developed regions being submerged in debt and facing fiscal issues - investors are turning to gold again.

Sunday, October 21, 2012

Week in Nutshell.

While the indices were flat for the week, the currency depreciated second week in a row. INR has now depreciated 3% in the last 2 weeks. A probable factor could be considerable slowing of FII inflows with the last 2 weeks run rate dropping to INR 3-4 Bn from INR 20-25 Bn over the last 5 weeks. The next trigger is likely to be the RBI meeting due on Oct 30th. In a recent series of interaction with banks, they highlighted their inability to compete with the bond market for high quality corporate lending due to the BASE RATE. So, a RBI rate cut will not only better sentiment towards investments but also braodbase the credit growth away from the retail and housing segment now.
Indian banks had gross non-performing assets (GNPAs) of 2.9% at the end of March 2012. The same has gone up almost 40% in the last 2 years. That is not all. Critically restructured assets and NPAs are expected to rise further by the end of FY13. As per Crisil estimates, gross NPAs are likely to touch 3.5% by March 2013. The worries over asset quality are more so in the case of public sector banks (PSBs). During FY12, gross NPAs of PSBs grew by Rs 390 bn compared to only Rs 5 bn in the case of private sector entities. One reason could be that the the PSBs account for around 80% of the banking sector's credit. Two, the major sectors that reported irrecoverable loans are real estate, textile, aviation and infrastructure (specifically, power and telecom), in addition to priority sector loans. Again, PSUs are the major lenders to these. In cases like textile, aviation and power the lending by PSU banks were despite poor fundamentals of the sector. Interestingly, even when it cam e to priority sector lending it was the PSUs that took the hit. Join the dots together and we can understand the reluctance of private and foreign banks to lend more to priority sector.

The RBI on its part is focusing on priority sector lending to encourage banks to undertake more direct lending to farmers. It has even extended the scope of such loans to include cooperatives of farmers and loans to government agencies for construction of dwelling units and slum rehabilitation. But there is nothing that suggests that such loans will be serviced well. Under priority sector norms, banks need to set aside 40% of their total credit to agriculture, exports and micro lending. Little wonder that the non-PSU banking entities prefer to invest in NABARD bonds rather than lend to priority sector. RBI would do well to ensure quality in priority sector lending before expecting rise in volume.

 
 

EU leaders agree to bank supervisor for 2013.

 EU leaders have agreed to give the ECB oversight of eurozone banks starting from next year, a critical step that will allow the ESM to begin recapitalizing troubled institutions. The ECB will start by supervising banks that received state aid and then large cross-border firms, with all of the eurozone's 6,000 banks set to come under its aegis by 2014.

Thursday, October 18, 2012

Euro Soars To New Highs Versus The Dollar & Yen


The Euro soared to a 1-month high against the US Dollar and Japanese Yen on Wednesday after Moody's kept Spain's credit rating in the Investment grade for the time being at least.

This moved eased some concerns amongst traders as the single currency continued to rise although the Spanish rating remains just one notch above junk.

The steps taken by Moody's also serves as relief for Spain, which is due to sell up to 4.5 billion Euros of bonds at an auction coming up tomorrow.

The Euro rose earlier today against most major peers. Moody's Investors Service has held Spain's rating at investment grade and investors focus on the European Union (EU) leaders meet tomorrow in Brussels.

As I mentioned recently, expectations are growing that before the EU Summit, even as soon as today, Spain will request aid.

Interestingly, German has shifted its policy somewhat as it now appears open to support Spain in such a request, with German officials openly now indicating an easing of German resistance to a full sovereign bailout for Spain.

On Tuesday, Moody's announced that it has assigned a negative outlook on Spain's Baa3 sovereign debt after it confirmed a review for possible further downgrade of Spain's rating that it had initiated in June.
On Thursday, Spain will sell bonds due in 2015, 2016 and 2022 after Tuesday's better than expected debt sale, which has seen the nation's 10 year yield fall by one basis point to 5.81%. I expect that yields will decline further and what this means, is that this would be positive for risk sentiment. It also means that the Dollar could be primed to decline further.

In fact, many analysts predict that there is a possibility that the Euro may rise to the highest level against the Dollar in more than five months, in the short to near term. A timely request for aid from Spain would be Euro positive.

The Euro earlier today had gained 0.3% to $1.3095 and hit 103.52 Yen, the highest since September 19th. The Dollar fell by 0.3% to 78.68 Yen.

The Dollar was down against most of its major counterparts, ahead of data that may show that new housing construction in the U.S. had climbed in September and, has resulted in curbed demand for safer assets.

The U.S. Commerce Department is to releases its report on housing starts today. The data is expected to show that new construction rose to a 770,000 annual pace in September from 750,000 in August.


Spain escapes Moody's downgrade.

 Moody's has affirmed Spain's credit at Baa3 with a negative outlook. "The risk of the Spanish sovereign losing market access has been materially reduced by the willingness of the ECB to undertake outright purchases of Spanish government bonds," the ratings agency explained. With Spain edging towards a credit-line bailout, Moody's lack of action helped send the country's 10-year bond yield 29 bps lower to 5.52%.

Germany lowers 2013 outlook.

Germany has cut its 2013 GDP growth prediction to 1% from a previous forecast of 1.6%, but said that growth this year will be 0.8% rather than 0.7%. However, both new figures would represent a slowdown from 4.2% in 2010 and 3% in 2011. "Germany is navigating stormy waters because of the European sovereign debt crisis and an economic weakening in emerging nations in Asia and Latin America,".

Wednesday, October 17, 2012

The coming 19th October would mark the third anniversary of the Eurozone crisis. The first question that comes to mind is: How far the Eurozone has come in dealing with the crisis? There is no clear answer. There is still extreme uncertainty about the future prospects of the region. The Eurozone bourses have been witnessing low trading volumes. Merger and acquisition has come to a grinding halt. And so have initial public offerings. This just shows investors have no clue where things are headed.

So what's really going on? An article in Financial Times has an apt answer. It says that Europe's 'muddle along' plan is going to prove dangerous. By now, the actions and reactions of Eurozone policymakers follow a characteristic pattern. At every turn of the crisis, there have been market sell-offs, policy reactions and short term relief. The article points out that this is then followed up by complacency, backtracking until the crisis re-intensifies again. The problem with this is that there is no definite direction. Investors are now seeking clarity. A positive outcome would be that the monetary union moves towards a stronger fiscal union. On the other extreme, there is a possibility of a broad debt restructuring or the breaking up of the Eurozone. Some believe that the euro break-up would not be catastrophic, but beneficial. It will allow for a fresh start. It remains to be seen if the logic appeals to the EU policymakers. Most likely, they will prefer 'mud dling along' till the crisis reaches its peak.

What does Vikram Pandit's sudden exit mean?

Vikram Pandit has had a checkered track record during his stint as chief of Citigroup. The ex-CEO of the global bank was named in the list of worst ever American CEOs way back in 2009 itself. This was a little after he took over the reins of the subprime loss hit bank in 2007. He did steer the bank through the rough weather in 2008. However, the results were not to satisfaction. But his exit from the bank yesterday was as unceremonious as his predecessor Charles Prince's. The latter announced his exit in 2007 taking complete responsibility for US$ 14 bn of subprime losses. However, Pandit's sudden exit has been rife with speculations about under performance and bonus issues. Citi's failure to pass the recent stress test by US Fed has been one of the key issues . It may be noted that for much of his tenure, Pandit took a notional US$ 1 salary in line with the bank's austerity motive. But he did so after reaping more than US$ 160 m from the sale of his Old Lane hedge fund to Citi. It is therefore not surprising that the shareholders' of the bank were not willing to dole out big bonus for an average performance. Having said that, the woes of Citi are far from over.

Spain mulls request for credit line from ESM.

 Spain is considering asking for a credit line from the ESM for its bailout so that the country would only take loans when needed, a government official tells reporters. With debt yields below danger territory, Spain is in no rush to ask for assistance; the hope is that just the existence of the line will be enough to send borrowing costs plummeting and the stock market surging.

Will Indonesia be the next member in the BRICS? Seems quite likely.

The BRICS (Brazil, Russia, India, China and South Africa) countries were until some time ago, the apple of the investors' eye. However, these economies are facing challenges in the form of slowing growth and high inflation. As such, many a global investors have been shying away from investing in these countries.

There is another emerging economy that appears to be a lucrative investment opportunity for investors. The name is Indonesia. Currently ranked 16th, the country is expected to become the 7th largest economy by 2030. Owing to factors such as robust domestic consumption and a rising middle class, Indonesia features among the fastest growing economies in the world today. It must be noted that the country was severely affected during the Asian financial crisis of 1997. However, it has shown great resilience in the recent global crisis. The economy has been growing at a healthy rate of about 6%. And the same is expected to continue going forward.

Indian inflation exacerbates central bank dilemma.

 While China could be getting its economy back on track, Indian inflation rose to +7.81% on year in September from 7.55% in August and vs. consensus of 7.75%. The increase was fueled by the government raising diesel prices by 14% to help get control of its ballooning deficit. The figures exacerbate the dilemma facing the Reserve Bank of India: how to rein in inflation against the background of slowing growth

Even a “Turnkey” contract has to be split into various components


National Petroleum Construction Company vs. ADIT (ITAT Delhi)

The assessee entered into a contract with ONGC for fabrication and installation of on-shore and off-shore oil facilities and pipelines. The assessee claimed that though the contract was one, it had to be sub-dividend into two parts, one for designing, fabrication and supply of material and the other for installation and commissioning of the project. It was claimed that the work relating to the former was carried out exclusively in Abu Dhabi and hence no income relating to receipts for that part of the contract was liable to tax in India as the there was no PE in India. The AO & DRP rejected the claim on the basis that (a) the contract was a “turnkey” one where the entire risk of completion & commissioning was on the assessee & it was not divisible into different components, (b) the assessee had a project office in India which was a PE, (c) the assessee had a Dependent Agent PE, (d) there was a “construction and installation PE” under Article 5(2)(h) & (e) ownership of the equipment transferred to ONGC only after issue of the certificate of acceptance of the entire work. It was also held that s. 44BB was not applicable and the profit was estimated at 25% of gross receipts. On appeal by the assessee to the Tribunal HELD:

(i) The assessee’s project office in India constituted a PE. It also had a “Dependent Agent PE” and also a “construction and installation PE” under Article 5(2)(h);

(ii) However, though the contract was on a “turnkey” basis, it had to be regarded as an “umbrella contract” and as being a divisible contract because the consideration for various activities has been stated separately. Also, ONGC had the discretion to take only the platform erected by the assessee in Abu Dhabi without having installation thereof. The segregation of the contract revenues into offshore and onshore activities was made at the stage of awarding the contract. The total consideration was earmarked towards different activities and separate payment had to be made on the basis of work of design, engineering, procurement and fabrication. These operations had been carried out and completed outside India. The PE was in respect of the installation and commissioning work done in India and the activities carried outside India were not attributable to the said PE (Hyundai Heavy Industries 291 ITR 482 (SC), Ishikawajma-Harima Heavy Industries 288 ITR 408 (SC) & Roxon OY 103 TTJ 891 (Mum) followed);

(iii) The work of installation of the platform done inside India does not fall u/s 44BB because the activity cannot be regarded as a “facility in connection with the prospecting for, of extraction or production of, mineral oils”.


IMF: EU banks face massive deleveraging.

 The European banking system may have to deleverage by $4.5T by the end of 2013, the IMF has said, upping its "weak policies" asset sale scenario from $3.8T in a forecast in April. The result would knock four percentage points off GDP growth in the periphery next year. "Intensification of the crisis has manifested itself in capital outflows...at a pace typically associated with currency crises or sudden stops," the IMF said.

Unconditional guarantee for Air India again.

That bailouts have not helped in kick starting economies is a lesson for all to see. The crux here is whether we have learnt anything from the same. Take the US for instance. No amount of money printing and quantitative easing lessened the woes of the US economy. And yet the Fed goes ahead and announced a third such round. Europe is no different. As certain European economies teetered on the edge of bankruptcy, the only solution that the region could come up with is bailout with more quantitative easing. Sadly, such a scenario seems to be unfolding in India as well. Although this is for a company rather than the country. And the company we are talking about is none other than the debt saddled Air Ind ia. The finance ministry has now approved an unconditional guarantee for Air India's Rs 74 bn bond issue. With a guarantee in hand, the airline will now issue non-convertible debentures and repay the high-cost short-term working capital facility availed from 19 banks. This along with equity infusion by the Centre and taking over aircraft loans were the key elements of the airline's Rs 300 bn financial restructuring plan cleared by the cabinet in April.

Tuesday, October 9, 2012

Euro Zone Finance Ministers Defend Spain

The Euro dipped from recent 2-week highs against the US Dollar and the Japanese Yen on Monday as growing doubts about Spain continued to surface but, Euro Zone finance ministers stated Spain does not require a bailout just yet.

Ministers defended Spain on Monday, stating that the nation was taking steps to resolve debt issues and rescue its troubled economy.

Meanwhile, the World Bank scaled back its forecast for East Asia, and with rising concerns about the state of the global economy coupled with increasing nervousness surrounding corporate earnings, most investors were driven to safe haven currencies.

The main market focus on the European front then is on Spain and Greece. Expectations are that positive progress will be made as regards both nations however, I don't expect that progress will actually provide enough of a spark to be a major catalyst for the market.

The Dollar Index (DXY), which measures the currency against those of six major trading partners, has fallen by 4.6% and 3.9% in the first two rounds of Fed stimulus. However, analysts expect that the latest round of stimulus will have different results, as investors likely will demand the world's reserve currency as U.S. growth outpaces its developed counterparts.

The logic is that should the U.S. economy keep outperforming, then this shouldn't cause the U.S. Dollar much damage and that monetary easing is only a short term negative for the Dollar.

The Dollar Index was little changed at 79.506 today.

Japan's current-account surplus grows.

Japan's current-account surplus widened to ¥454.7B ($5.8B) in August from ¥436.3B a year earlier, the first such increase for 18 months as lower energy prices helped offset the strengthening yen and falling exports. The latest figure beat consensus but fell from July. Bank of Tokyo- Mitsubishi strategist Takahiro Sekido says the year-on-year move was "a temporary blip in a negative trend."

IMF warns eurozone to take haircut on Greek debt.

The IMF is threatening to cut its financing to Greece unless eurozone countries take haircuts worth tens of billions of euros on the country's debt, the WSJ reports. The eurozone is resisting the IMF's suggestions, which include having the ESM take on Greek debt of $50B, a move that could slash the country's burden by 15%-20% of GDP.

IMF lowers global economic outlook.

 In no real surprise, the IMF has cut its global growth estimates again, predicting a rise of 3.3% this year (down from 3.5%) and 3.6% in 2013 (down from 3.9%). The fund has raised its estimates for U.S. growth slightly to 2.2% in 2012 and 2.1% in 2013, but forecast that China will weaken to 7.8% this year and grow 8.2% next year. Key factors include the U.S. "fiscal cliff" and the fate of the euro.

IMF: EU countries to miss budget target.

 Spain's budget deficit will hit 7% of GDP in 2012 and 5.7% in 2013, thereby missing EU-agreed targets of 6.3% and 4.5% respectively as the country recapitalizes its banking sector, the IMF has forecast. The fund added that debt will hit 90.7% this year and 96.9% next year, well above Spanish estimates. The fund also predicted that France and Italy will miss their goals, and warned that the U.K. should slow austerity if the economy continues to founder.

Sunday, October 7, 2012

Friday Flash Crash makes Nifty drop 800 points .

Technology turns things around. But not always for the better. Operational errors happen once in a while but when they do, they really can disrupt things. A glaring instance of this was seen in the markets on Friday when an erroneous trade by domestic financial services firm, Emkay Global, ended up halting the trading systems of the National Stock Exchange (NSE). Involving amounts over Rs 6.5 bn, the multiple erroneous trades at low prices triggered index filter and led to a halt in trading. As an outcome, NSE-Nifty lost 800 points. BSE-Sensex wasn't spared either and took a 200 point hit. While there were no long term consequences, the event is indeed an eye opener and offers us opportunity to make amends. The wide usage of algorithmic trading software in such large numbers can cause huge losses to the market and is something that needs to be addressed by the exchange.

NPAs of Indian Banks may surge by 27% in FY13 alone.

Rs 1.6 trillion. That is the staggering amount of bad loans that have accumulated in Indian banking system at the end of the June quarter. This estimate put forth by Assocham seems unbelievable at first glimpse. Especially given the fact that Indian banking sector is governed by a regulator as prudent as Reserve Bank of India (RBI). But that is not all! Assocham has gone ahead to predict that the non performing assets (NPAs) may surge by 27% in FY13 alone. This will result in pushing up the net NPA to loans ratio from 2.9% to 3.8% for the entire sector. Not one but many issues have contributed to this mess. Poor health of borrowers, in some cases government entities, is prime amongst them. Cases in point being Air India and State Electricity Boards. The government's insistence to lend more to bad borrowers by restructuring the loans has magnified the mess. I n addition, lack of reforms, pol icy bottlenecks etc are issue on which neither the bankers nor the RBI have any control. Further lower profits for the sector have limited banks' ability to write off bad loans. All in all, the health of Indian banking system is not very sound. Even in 2008, when global banking was in a state of crisis, Indian banks enjoyed a safe haven status. For problems that are of our own making, Indian banks have lost the halo around them. The sooner they address the problem, they better for the economy.

Rupee hits six month high.whether the smooth ride for the rupee will continue?

Whether Indian stock markets will touch new highs this year is anybody's guess. But the trend that is equally engrossing for bankers, economists and policy makers this year is the rupee's gain against the US dollar. The rupee recently rose to a near six-month high against the US dollar. This was primarily in response to recently announced reforms. The measures to attract foreign investment in the areas of retail, insurance and pension has revived interest in the Indian currency. Moreover, the government's keenness to improve India's fiscal status has given some confidence in the state of the economy. However, it is unlikely to be a smooth ride for the rupee. Political uncertainty and relatively weak economic fundamentals is l ikely to make the currency gains vulnerable from here on. Moreover, the proposed reforms will face a tough fight in Parliament before they stand a chance to get passed as bills. Hence, investors and importers may make hay while the rupee outshines the dollar. However, the resolution of fiscal and current account deficit problems will decide its final fate.

Thursday, October 4, 2012

Treasurys slip as inflation fears reappear.

 A month of low yields was broken just before the Fed was to release minutes of the September meeting where it embarked on QE3. “Expectations for U.S. inflation are rising in markets,” says one strategist in explaining how demand for longer-maturity bonds will suffer.

Spain hits the ceiling at bond auction.

 Spain's government sold €3.992B of bonds with demand strong across all maturities. The mark falls just short of the maximum target of €4B set for the auction. Yields fell on the five-year bond to 4.77% and 3.28% on the two-year variety

Whether s. 43B & s. 14A disallowance can be made under Article 7(3) of the India-Mauritius DTAA

State Bank of Mauritius Limited vs. DDIT (ITAT Mumbai)

The Tribunal had to consider two issues: Whether in view of Article 7(3) of the India-Mauritius DTAA, a disallowance u/s 43B and s. 14A was permissible while computing the assessee’s income. HELD by the Tribunal:

(i) Article 7(3) of the India-Mauritius DTAA provides that “in determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere“. This is in contrast to the other DTAAs (e.g. India-USA DTAA) which provide that the deduction shall be “in accordance with the provisions of and subject to the limitations of the taxation laws of that State“. As there is no limitation, the result is that all expenses incurred for the purpose of business of the permanent establishment have to be allowed as deduction and no disallowance u/s 43B can be made. Neither Article 3(2) nor Article 23(1) make any difference to this interpretation;

(ii) However, the position with regard to s. 14A is different because unlike other disallowance provisions which disallow deductible expenditure, s. 14A contains a fundamental principle that any expenditure incurred in relation to an income not includible in total income, shall not be allowed as deduction. S. 14A, at the very threshold itself, snatches away the deductibility of expenses incurred in relation to an exempt income. It is not a case that the expenses are otherwise deductible but have become non-deductible due to the operation of s. 14A. Rather, the expenses do not qualify for deduction at the very first instance in accordance with the principle that if an item of income is not chargeable under the Act, the related expenditure has to be ignored.

Tuesday, October 2, 2012

Moody's skeptical about Spanish stress tests.

 Spanish banks could require cash infusions of €70B-€105B, Moody's has estimated, well above the €53.7B gap found by independent stress tests. However, the agency said a recapitalization is still "intrinsically credit positive" for Spain's lenders, as it would involve more capital and banks than previous attempts.

Dollar under pressure as are Euro and Aussie


On Thursday, the Fed will release minutes of its September 13th meeting, when it announced that it will purchase $40 billion of mortgage bonds a month. On Monday, Bernanke said that the central bank will continue with record stimulus even after economic expansion gains strength.

Bernanke went on to say that the Fed expects that the U.S. economy will continue to grow, and that "Our concern is not really a recession. Our concern is that growth will continue but at a pace that's insufficient to put people back to work".

A report is due out on Wednesday from ADP Employer Services, that will likely show that U.S. companies have hired 140,000 workers in the month of September, compared to 201,000 in August. The government is set to release its monthly payrolls report on Friday, October 5th, a day after weekly jobless data is due.

I foresee the Dollar's being kept relatively weak. On the one hand, global economic concerns may assist its strength though, on the other, continued printing by the Fed will counteract that and keep it weak. As a result we could expect fluctuations in its strength over the short to medium term.

Earlier today, the Dollar touched $1.2912 per Euro, and was down at 78.09 Yen from 77.99. The Yen lost 0.3% to 100.85 per Euro.

The Reserve Bank of Australia (RBA) has cut its benchmark interest rate to the lowest level since 2009.

A global slowdown has weakened commodity prices which have assisted in driving 21 years of growth without a recession. The RBA had lowered the overnight cash-rate target by a quarter percentage point to 3.25%. With a negative reaction in the markets to the RBA's decision, I think it likely as some analysts predict, that we'll see the Aussie decline to $1.0250 over the next few days.

The Australian Dollar Earlier traded at $1.0308.

The Euro saw limited gains ahead of a meeting of the European Central Bank on Thursday and of data, due out on Wednesday, which is forecast to show that retail sales in the Euro bloc have declined for a second month.

Figures released yesterday had shown that unemployment in the Euro area has climbed to a record 11.4% in August.

Spain is expected to press on with its analysis of whether to seek a bailout and is studying an ECB bond-buying proposal. Should Spain decide to ask for a bailout, economists predict that this will be a positive factor for the Euro.

I don't expect that any news out of Europe will get better in the short term, as the debt crisis is far from over and this will push the Euro-Dollar lower in the medium term.

Audit Reveals Spain Needs 59.3 Billion Euros


The Euro dropped to a 3-week low after the open of trading on Monday when an audit of Spain's banks failed to alleviate concerns about the country's progress towards a much needed bailout.

Investors are also waiting on the outcome of a new review of Spain's sovereign rating from Moody's, a move which may see it downgraded to junk status.

Another independent audit released on Friday had shown that the Spanish banking sector would need at least 59.3 billion Euros in additional funds to cope with its economic woes. Spain responded by saying it would only ask for 40 billion Euros to aid its banks.

Eurozone unemployment hits a record.

 Eurozone unemployment was 11.4% in August (June and July were revised higher to 11.4% as well), the highest since the data series began in 1995. "(It) still has not reached its peak," says Thomas Costerg of Standard Chartered. "A worrying trend is that the number of unemployed is now also expanding in core countries like Germany, which had been rather sheltered up to now."

Eurozone manufacturing sector remains in deep slump.

 September's PMI comes in at 46.1, up from August's 45.1, but in contraction territory for the 14th consecutive month. France is notably weak, its PMI falling to a 41-month low of 42.7, just a hair higher than Greece. Germany and Spain, however, rise to 6-month highs of 47.4 and 44.5, respectively.

Chinese manufacturing sector remains in contraction.

 September's official PMI of 49.8 improved from last month's 49.2, but fell short of expectations for 50.1. The HSBC PMI read - which represents smaller companies less likely to benefit from state ownership/support - continues to show greater weakness, coming in at 47.9, up from August's 47.6.

should investors dump gold to buy equities?

At a time when the world economy is slowing down and central banks are devaluing their currencies, gold has been one of the best investments. In a time span of just two years, gold prices have doubled in rupee terms thanks to the US Fed's QE (quantitative easing) programs and the massive rupee devaluation over the last one year. The performance of Indian stocks, on the other hand, has been dismal.

However, ever since the so-called 'reforms' have been announced, Indian share markets have witnessed a change of sentiment. While the BSE-Sensex has crossed its 14-month high, gold prices have dipped by about 4%. Many so-called 'experts' have already started giving big targets for the Sensex. Some are of the view that investors are now dumping gold to buy equities.

In our view, one should refrain from buying into such arbitrary arguments. And there is no reason why investors should sell gold to buy equities. Instead, we believe an optimal investment portfolio should have a mix of both in the right proportion.

Monday, October 1, 2012

Renminbi touches record high.

 After declining earlier this year, China's yuan has continued its march higher, hitting a record 6.2856 to the dollar due to strong corporate demand and banks avoiding short positions ahead of an upcoming week-long holiday. The rise in the renminbi comes after the currency sank to a 2012 intra-day low of 6.3967 in July, since when it has benefited from the dollar's retreat in the global markets

Spain to reveal how much cash needs to be thrown at its banks.

 Spain is scheduled to disclose how much additional money its banks will require when it releases the outcome of independent stress tests on the sector later today. In June, preliminary results showed that banks would need up to €62B in a worst-case scenario. The assessments come after the government yesterday unveiled further austerity in its 2013 budget, which was well received by the market.

Britain is smack in the middle of the longest double-dip recession since World War II.

 Official records show that the country ran up its largest current account deficit on record in the second quarter of 2012. The deficit was a whopping GBP 20.8 bn. This includes UK's trade balance and a shortfall on overseas investments. The country's citizens are facing tough times. Household spending was down 0.2% over the quarter. The largest declines were in restaurants and hotels, tobacco, and food and drink, as families cut back. However, one positive was that business investment rose 0.9% over the quarter. Overall, the economy contracted by 0.4% during the quarter, slightly less than the previous 0.5% estimate. The economy is still stagnating, and generating employment is the only way to lift economic sentiment. But this is much easier said than done.
 Country endowed with a wealth of natural resources is likely to be plundered if the laws governing them are weak. And more so in the case of a lame duck government! That's exactly the story of India. As such, it is not at all a surprise that the country has been mired in various mining scams. The latest coal blocks allocation scam has created a huge uproar and put the Prime Minister in a tight spot.

If you may recall, in February 2012, the Supreme Court had ordered the cancellation of 122 2G licenses. It had affirmed that natural resources should be distributed through a public auction. Thereafter, the government moved a Presidential Referendum seeking the opinion of the apex court on whether auctioning of natural resources across all sectors is mandatory in line with its 2G spectrum judgement. Further, it also asked for clarity on which resources need to be auctioned and which ones can be allotted on a first-come-first-serve basis.

The Supreme Court is expected to deliver its verdict today. Whatever be the verdict, it will have long-term implications for how the country's natural resources are allotted by the government. How will this affect companies? If the court makes auctions mandatory, it will bring in transparency and fairness in the allocation process. We believe that it is high time the country's natural resources part ways with crony capitalism.