Of US Fed Minutes, the Mess in Eurozone, and Trading the Markets in 2017...

The Federal Reserve released the minutes from its December policy review this week.

As per the minutes, economic activity in the US is expanding. The labour market continued to strengthen, job gains were solid, and the unemployment rate declined since the last meeting in November. Household spending rose moderately but business fixed investment remained soft. Inflation increased but was still below Feds target rate of 2%.

Going further, the committee expects improvement all around. As per the Fed, near-term risks to the economy are roughly balanced and probability of rate hikes in the coming months is higher.

Fed policymakers, however, did see looming uncertainty concerning fiscal, trade, immigration, and regulatory policies after President-elect Donald Trump takes oath on January 20. The committee seemed unsure of the size, nature, and timing of the policy changes.

In its December monetary policy meet, the US Federal Reserve raised its target federal funds rate by 0.25% to between 0.50% and 0.75%. The rate hike was the first since last December and only the second since the 2008 crisis, when the Fed cut rates to near zero and deployed other tools such as massive bond purchases to stabilise the economy.

The Fed's outlook is now for three more 0.25% hikes in 2017. And then three more increases in both 2018 and 2019. This would mean nine rates hikes over the next three years before the rate levels off at a long-term 'normal' of 3%.

We doubt the strength and durability of the US economic recovery since it has been driven mainly by massive doses of money printing and artificial suppression of interest rates. Hence, we also doubt the Fed's capability to further raise interest rates. As Bill Bonner wrote recently in Vivek Kaul's Diary...

    You know our prediction: The Fed will never willingly lead interest rates to a neutral position.

    It can't. It has created a debt monster. It must feed this Frankenstein with easy credit.

    This time last year, the Fed began its 'rate-tightening cycle'. That is, it began raising short-term interest rates.

    It pledged to continue to do so in 2016. But then it diddled and dawdled, fiddled and fawdled...claiming to be on top of the situation...watching its 'data' come in like a fisherman's wife waiting for the return of the fleet...and not wanting to admit she was already a widow.
Either way, there is going to be trouble. A quick succession of rate hikes would create a massive storm in the global financial markets. But no rate hike would lay the ground for much bigger financial storms later. Sooner or later, there will be an end to easy money policies. And that will lead to some big trends. Here's Asad Dossani, editor at Profit Hunter:

    Regardless how many more times interest rates go up, one thing is clear. This is the beginning of the end of easy money. At least, the end of easy dollars (easy euros, pounds, and yen will stay with us for a while).
As per Asad, the Fed's promise of more interest rate increases will lead to the end of easy money and will create big trends next year that traders can profit from.

In a slightly different vein, our friends at Equitymaster say these developments will lead to a number of ramifications, including a huge crash in the US bond market and wild swings in stock markets around the world. As per them, the best way to prepare for these eventualities is to invest a portion of money in safe blue-chip stocks.

The German Purchasing Managers' Index (PMI) for manufacturing rose to 55.6 from 54.3 in November, its highest level in 35 months. Rising demand from Asia and the US drove the uptrend.

Data showed that manufacturers in Germany raised their output at a quicker pace on back of improved domestic demand and new business overseas.

Further data from Germany showed that inflationary pressures increased in December. Input costs rose at the fastest pace due to a weaker euro. German Inflation jumped close to ECB's target of 2%, its highest level in more than three years.

The ECB has been pouring money into the eurozone in an attempt to boost inflation from a near-deflationary level.

In our view, a big crisis is brewing within the eurozone. And this is going to have major consequences for the global financial markets, including the Indian stock markets.

While the above data comes as a relief for the eurozone, the area's still a mess. First came the Grexit saga. Then there was Brexit. Now it's Italexit. In a recent referendum, the Italians voted to reject constitutional reforms, leading Prime Minister Matteo Renzi to resign.

A recent issue of Vivek Kaul's Inner Circle (requires subscription) presents an intriguing insight on Italexit from our global team of experts in London and other major world centres. Also, if you want to know what's really happening in the world of man and money, you can claim your free copy of Bill Bonner's latest book, Hormegeddon.

Global indices ended the week on a positive note after taking cues from the above developments. European stocks ended the week on a positive note. Stock markets in Germany and France were up 1.03% and 0.98%, respectively. Asian markets also ended their weekly session on a positive note. The Japanese markets were up 1.78%, while stock markets in Hong Kong were up by 2.28%. The US markets traded in the green and ended their session with nearly 2.56% gains.

Indian Indices Log Around 0.5% Gains

Indian share markets witnessed buying interest during the week. The BSE Sensex was up 0.49% for the week, while the NSE Nifty was up 0.7%.

We're just few days into 2017. If we look back, 2016 was a flat year for the Indian stock markets. The Nifty dipped nearly 12% in the first two months of the year. It then rallied quite smartly for the next six months...before caving in again.

Finally, the index ended the year with gains of just 3%. That's a disappointing result indeed for Indian stock market investors. For all the risk stock investors take, is a 3% return really worth it?

We understand that not all investors have a three...five...ten-year horizon. Some like to take advantage of short-term market swings. If that's you, you'll want to pay attention...

Apurva Sheth, editor at Profit Hunter, scored winner after winner with his Secret Profit Signal Strategy in 2016.

Now, you are probably thinking this is all history...and you're right. But Apurva is now ready to reveal what he believes will be a very lucrative strategy for 2017...a strategy that could help you make money without taking undue risk.

Yes, this is Apurva's Post-Demonetisation Trading Strategy... This strategy is easy to execute and has the potential to help you identify many exciting trading opportunities in 2017.

This training session is now LIVE! So don't miss it and Attend This Session Right Now!

Moving to news from the banking space... It's no secret the troubles at public sector banks (PSBs) are mounting day by day. 2016 was another year of struggle for PSBs with more bad loans piling up and recovery remaining elusive.

The dire situation was highlighted by the Reserve Bank of India (RBI) in its bi-annual Financial Stability Report (FSR) for 2016. The report raised the red flag on loan quality at public sector banks and diagnosed their key pain points. These points included the rise in non-performing assets (NPAs), low off-take of credit, liquidity mismatches, and diminishing profitability with negative return on assets in FY16.

These points coupled with low average return on equity could equal bad news for shareholders of PSU banks. From The 5 Minute WrapUp...

    As a shareholder in banks, if the NPA number does not worry you, here is something that should. The sector's average Return on Equity (RoE) has crashed from 10.4% in FY15 to just 3.6% in FY16. All thanks to the profits written off on account of NPA provisions. 70% of them in the books of public sector banks. More importantly, the drag in the ROE is likely to persist in FY17 too. So shareholders of public sector banks have a reason to re-think the margin of safety required to invest in such stocks.
A few days back, Tanushree Banerjee, Co-head of Research at Equitymaster, wrote about India's largest banks peddling teaser loans once again. As per Tanushree, 'Teaser loans could be the last nail in the coffin of banks reeling under bad loan problem.' And this should worry depositors in PSBs.

The recent correction in banking stocks shows that investors are testing the safety of their stocks...and finding the banking sector lacking. As an aside, Tanushree will be speaking about safe stocks at the Equitymaster Conference 2017, and you're invited. Mark your calendar for 21 January 2017. More details here.

In other news, the Global Economic Policy Uncertainty (GEPU) Index rose by a massive 149% in the eleven months to November 2016. This was the steepest rise ever and reflected the surprising events that took place in 2016.

The index tracks the general state of the world economy as it relates to businesses. It can include broad economy-wide conditions or the specific economic conditions of a particular industry.

An interesting bit here was that the index for India was benign compared to the global index. This meant that economic policy in India was more stable than the global economy.

But this doesn't mean that India is sailing safe amid the volatile times. The demonetisation move has fueled enough uncertainty in the Indian economy. In fact, the EPU index for India surged in November and December 2016 after the government scrapped old Rs 500 and Rs 1,000 notes. Further, it is also expected that the index will see an upward trend until mid-2017. Prepare for bumps ahead.

Meanwhile, we'll continue to tell you how to stay ahead of your fellow investors. If stock markets take a beating due to uncertainty, it could be the best time to get in on what you probably missed out on during the 2009 and 2013 crashes.

Don't let the uncertainty spook you. Instead, allow yourself the patience and perseverance to ride the market volatility. Our colleagues at Equitymaster believe they've found five warning signals, or red flags, that show up in a business right before its stock price plummets. Get the details in The 'Crash Score' Report.

Nifty Struggling Near Resistance zone of 8,250-8,300


The Nifty traded on a positive note during the week. The index remained in a tight range at the start of the week. Then, on Thursday, it opened gap up and continued to show strength throughout the day. Yesterday, the index again opened on an upbeat but couldn't sustain there for long. Towards the end of the session, it witnessed some selling pressure and ended the day down 30 points. The Nifty managed to end the week with a 0.70% gain. The index is facing stiff resistance from 8,250-8,300 levels provided by its recent high and 200 EMA. A sustained close above these levels will help gain positive momentum for the index.

COMMODITIES

Gold Extends Previous Week's Rally

Gold witnessed buying interest during the week. While it opened its session on a negative note, it managed to recover those losses later on. Gains during the start of the week were seen amid positive cues from the global markets. Also, demand for the yellow-metal from jewelers coupled with a weak dollar aided the uptrend for dollar. During the end of the week, gold continued its momentum and ended its weekly session on a positive note.

Gold Trades on a Positive Note


Silver Trades in Tandem with Gold

Silver also traded on a positive note during week. Gains were seen on back of a firm trend in global financial markets overseas. It opened the weekly session higher and continued its momentum thereon. Finally, on Friday, silver witnessed gains and ended its weekly session on a positive note.

Crude Oil Trades on a Volatile Note

Crude oil traded on a mixed note during the week. It witnessed buying interest during the start of the week. Most of the gains were seen on Tuesday, when crude oil hit 18-month high. These gains came on hopes that OPEC and non-OPEC members will cut production to reduce global supply glut. During mid-week crude oil faced some selling pressure on back of a strong dollar overseas. However, it managed to recover these losses during the end of the week and ended its session with weekly gains.

Crude Oil Ends in the Green

Natural Gas Tanks by Around 11%

Natural gas witnessed most of the brunt during the week. It opened its session on a negative note and extended the downtrend throughout the week. The negative trend intensified during mid-week and the commodity lost more than 11%. Losses were seen amid warmer weather forecasts. On Friday, the selling continued and natural gas ended its session with weekly losses.

CURRENCIES

Dollar Ends with Marginal Gains

The dollar traded on a volatile note during the week. It witnessed buying interest during the start of the week due to dollar demand overseas. Further, the strong US data coupled with expectations that the Fed will further increase interest rates aided the rally for dollar. Come midweek, the dollar witnessed slight losses amid global volatility. Finally, it ended its session with marginal gains on Friday.

Dollar Ends on a Flat Note


Euro Volatile Amid Economic Data Releases

The euro traded on a mixed note during the week. It started the week on a negative note. It remained under pressure during midweek as well. Losses were seen ahead of the economic data releases during the week. Furthermore, a strong dollar overseas also weighed on euro. However, the euro managed to recover losses during the end of the week to end its session on a positive note.

Pound Trades on a Mixed Note

The pound opened its session on a positive note and witnessed buying interest during the start of the week. Some losses were seen midweek amid the global volatility. However, on Friday, the pound managed to recover losses and ended the week on a positive note.

Yen Ends on a Positive Note

On Monday, the yen opened its session on a positive note. However, it failed to maintain the momentum and witnessed losses during the latter part of the week. Losses were seen on the back of a firm dollar overseas. Fed minutes indicating further rate hikes in 2017 also weighed on the yen. During the end of the week, the yen witnessed buying interest and ended its session firm against the rupee.

Commodities 30th Dec 6th Jan % Change
Gold/10 gms 27,445 27,887 1.61%
Silver/kg 39,049 40,342 3.31%
Crude Oil/barrel 3,650 3,682 0.88%
Natural Gas/mmBtu 252.00 224.30 -10.99%
Currencies 30th Dec 6th Jan % Change
INR / USD 68.10 68.11 -0.01%
INR / EUR 71.92 72.20 -0.39%
INR / GBP 83.82 84.30 -0.57%
INR / JPY 58.39 58.81 -0.72%

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