Markets have an uncanny habit of placing the cart ahead of the horse. The remedy to prolonged lower prices is lower prices itself. It is akin to homeopathy, wherein poison kills poison. Any structural problem needs a constitutional remedy. Swift recovery in prices without any shift in underlying fundamentals derails the much needed process of calibration in supply/demand equilibrium.
The resurgence is attributed to production freeze by OPEC at January levels, wherein major producers concurred on the decision, while Iran was provided a special exemption to expand the output, considering that the Islamic Republic has just got the monkey of its back (free from economic sanctions).
Negative interest rate policy adopted by ECB and BOJ clearly conveys that central banks are running out of ammunition in order to combat deflation. This is constructive for gold prices. We infer that such fragile economic landscape will eventually bring gold as an investment avenue back in the reckoning.
Fed’s inability to move on the rates portrays a complex situation. The problem with kicking the can down the road is that global economic conditions are not at all poised to improve for the next few quarters.
With the September US FOMC meeting just a week away, markets world over continue to factor in the repercussions of the September Federal Reserve meeting.
Mr. Rajan reiterated that that money market rates have come down substantially, reflecting the series of rate cuts this year. Nevertheless, transmission of monetary policy is not evident in the bank lending rates. There is a lag of 3-4 quarters and it will take time for the effect to percolate.
On Greece front, the crisis has escalated, wherein the nation has voted a ‘No’ in the referendum, rejecting the creditor’s demand of spending cuts in exchange of a bailout deal. European officials are not pleased with the outcome, as they wanted the incumbent Greek regime to conform to their demands.
In fact, ‘Grexit’ will be eventually construed bullish for the entire Euro region, as market participants will realise that departure of Greece implies no more bailout and no more debt burden. Forget repayment of loans, the stressed nation was not even able to service its debt. Time is of credence that bailout money has failed to solve the structural woes, unless Greece treads on the path of serious financial prudence, which eventually entails cut in fiscal spending.
On the exchange front, stock and commodities exchange will have the luxury in encroaching each other’s domain.
Volatility in the equity markets makes it imperative to hunt for an avenue, which provides capital protection. Reserve Bank of India has already announced measures to lure retail investors towards government bonds. Retail individual investors would be provided direct access to both primary and secondary market platforms without any intermediaries.