BoJ and ECB: The Easy Money Policies Continue

The Bank of Japan (BoJ) kept monetary policy steady on Thursday. It also raised its growth forecasts and offered a more upbeat view for the Japanese economy. Most of this optimism was fueled by robust exports and private consumption.

The central bank, however, once again pushed back the timeframe for achieving its ambitious inflation target. This reinforced views that the BoJ will lag well behind other major central banks in scaling back its massive stimulus program.

The central bank now expects inflation not to reach its 2% target until some time in fiscal year 2020.

The central bank also kept intact guidance that it would continue to buy government bonds so its holdings increase at an annual pace of 80 trillion yen (US$714 billion).

Many issues remain that can hamper Japan's economic growth. The economy is flooded with excessive money printing, too much debt, too much government intervention, and stock market manipulation.

The BoJ's moves are in line with the easy money policies that central banks have adopted around the world. However, with the changes at central banks in 2016, it seems that the end of easy money is near.

China second-quarter gross domestic product (GDP) maintained its annual growth rate at 6.9%. Likewise, urban investment in June remained steady with an 8.6% annual growth rate.

The news came as a welcome breather as investors watch the world's second-largest economy for signs of slowdown amid concerns over high debt levels.

But like Japan, many concerns remain for China.

The Chinese government is aiming for annual GDP growth this year to come in around 6.5%. This is lower than the 6.7% pace recorded in 2016. It would also be the slowest growth in 26 years.

Note that, while the Fed's balance sheet expanded rapidly during the financial crisis, from less than US$900 billion in 2007 to US$4.5 trillion in 2014, the PBOC's balance sheet less than doubled in size during that period.

China is staring at rapid domestic credit growth. Also, as per ratings agency Moody's, China's structural reforms are not enough to arrest its rising debt.

Moody's Investors Service has downgraded China's sovereign ratings by one notch to A1. The agency expects the financial strength of the world's second-largest economy to erode in coming years as growth falters and debt continues to rise.

Many economists are also of the view that central bank stimulus measures are masking the deeper problems of industrial overcapacity and high levels of corporate debt in China.

A recent issue of Vivek Kaul's Inner Circle (requires subscription) takes a closer look at the Chinese economy and explores how America and China are on the verge of swapping their economic ideologies.

British parliament's upper house is of the view that Brexit will have a profound and unpredictable effect on UK. They say Brexit poses a fundamental challenge to the future of the United Kingdom by removing the European Union law that has helped bind the UK together.

It also said Brexit would lead to a significant increase in powers and responsibilities for local institutions, in areas such as fisheries and agriculture. Any attempt at a power grab by either side would only add to instability.

The vote to leave the EU last year has highlighted tensions among the UK's four constitution nations. While England and Wales voted to leave, Scotland and Northern Ireland voted to remain in the EU.

Earlier this year, in March, UK Prime Minister Theresa May triggered the formal two-year process of Brexit negotiations. This came after the British Ambassador in Brussels hand delivered a letter to European Council President Donald Tusk invoking Article 50 of the Lisbon Treaty, officially notifying the European Union (EU) of Britain's decision to withdraw from the bloc.

British MPs overwhelmingly approved a bill allowing Prime Minister Theresa May to trigger negotiations for the UK's exit from the EU.

Market participants are gauging the effects these developments will have on Europe and global trade.

Britain's divorce from the EU bloc will have major implications for financial markets and exchange rates. It will also lead to more global economic uncertainty.

Asad Dossani, Profit Hunter editor, has written on how one can successfully trade political events such as Brexit.

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Meanwhile, the European Central Bank (ECB) left its ultra-easy monetary policy unchanged, suggesting that it may delay its decision to taper bond buys until autumn when the matter will be discussed again.

The ECB is not in a hurry to taper stimulus as inflation is still not at the bank's target level.

After ECB chief Mario Draghi raised the prospect of policy tightening last month, he signalled that any policy tweaks would come only gradually, setting the scene for a possible discussion in September about the long-awaited tapering of its asset buys.

Global financial markets ended the week on a mixed note. The US markets were up 1.8% for the week. The UK's FTSE 100 ended up by 0.9% and France's CAC40 ended the week down by 1.4%.

Marginal Gains for Indian Indices

Back home, the Indian indices closed marginally higher for the week. The BSE Sensex was up by 0.1% for the week.

Most of the gains during the week were seen on the back of the June quarter earnings season and updates on GST implementation.

The Goods and Services Tax became the order of the day at the start of this month. But for many months before its implementation we have been subjected to relentless propaganda from the government and GST supporters on how it will change our world only for the better.

Our colleague Vivek Kaul has studied the finer aspects of the GST and has offered predictions on what could go right...and what could go wrong.

Download his special report - The Good, the Sad and the Terrible (GST).

In the news from the IPO space, SBI Life Insurance, a joint venture between the State Bank of India (SBI) and BNP Paribas Cardif, has filed its draft red herring prospectus with the Securities and Exchange Board of India (SEBI).

According to the offer document, SBI holds 70.1% and BNP Paribas 26% in the life insurance company. SBI, the country's largest bank, is selling up to an 8% stake, or 80 million shares, in the unit as part of the IPO. BNP Paribas is selling up to a 4% stake.

HDFC Standard Life Insurance Co Ltd's board has also approved a proposal to sell as much as 20% of the insurer through an IPO.

The public issuance would be an offer for sale by HDFC, the parent company, and UK-based Standard Life, which holds a 35% stake.

This would make it the third major life insurer heading to stock exchanges after ICICI Prudential Life, which listed last September, and SBI Life.

Notably, the Insurance Regulatory and Development Authority of India (IRDAI) did not give a go-ahead to an HDFC Life-Max Life merger in the form it was proposed about a year before. After that, it appears HDFC Life and Standard Life worked on an alternative structure.

With life and general insurers queuing up for IPOs, it will be interesting to see how quickly HDFC Life progresses on this.

The insurance sector in India is set to grow leaps and bounds. It is only a matter of time that this sector witnesses a flurry of M&A activities, which will require swift and proactive action from the regulator.

Our big-picture editor, Vivek Kaul, recently penned a pertinent report on entire insurance industry. We strongly recommend you go through the full report to learn what's really happening in the insurance industry in India...and how it affects you. If you do not have access to The Vivek Kaul Letter, sign up here.

And finally, our colleagues at Equitymaster have also prepared a guide to help you understand the valuations of insurance businesses.

Nifty 50 Index Trades on a Volatile Note

The Nifty 50 Index traded the week on a volatile note. On Monday, it opened the session gap up to hit a fresh lifetime high. It then gap down 83-points the following the day and witnessed selling pressure. But the index recovered strongly going into the weekend. On Friday, the index witnessed some more volatility but finally ended the week with 0.29% gains.

Last week, we mentioned the 9,700 level might offer good support as per the change of polarity principle (previous resistance now support). The 20-day exponential moving average (EMA) might also act as a support on reactions if any.

Although the index did not come even close to this level, the 20 EMA (now placed near 9,770) and 9,700 level might act as a good support in the coming week as well.

COMMODITIES

Gold Rises on Safe-Haven Bets

Gold traded on a positive note during the week. Most of the buying interest came as market participants sought safe-haven bets after taking cues from a weak trend overseas. Slight losses were seen midweek. However, gold managed to recover these losses and ended its session with gains.

Gold Trades on a Positive Note

Silver Trades in Tandem with Gold

Silver too witnessed buying interest during the week. It traded on a positive note during the start of the week amid a positive trend in precious metal markets overseas. Gains were also seen midweek. During the end of the week, silver continued its uptrend and ended its session on a positive note.

Crude Oil Witness Gains; All Eyes on OPEC Meet Next Week

Crude oil witnessed buying interest during the week. Most of the gains came in after data showed a fall in US crude stockpiles. According the Energy Information Administration (EIA), US crude inventories fell 4.7 million barrels in the week to 14 July. This was against analyst expectations for a decrease of 3.2 million barrels.

Crude oil was also in focus ahead of a key OPEC meeting next week.

The gains this week came as a welcome breather as crude oil has been falling lately on concerns about rising OPEC output.

Owing to the supply glut, crude oil prices have been remarkably silent over the last two years. Prices have remained within a tight range, rarely dropping below US$40 or rising above US$60. Volatility has crashed. And if you are trading crude oil, it's critical to understand why this has occurred.

An issue of Vivek Kaul's Inner Circle (requires subscription) explains what has triggered this taming of crude oil prices.

On the domestic front, rising oil prices do not bode well for the Indian economy. India is hugely dependent on petroleum imports. In fact, the share of petroleum imports for India has only increased over the years.

India is the world's third-largest oil consumer. And energy consumption in India is set to grow as our economy remains one of the few 'bright spots' in a slowing, aging world economy. So India could face a potent risk should crude oil prices rise.

The only way out for India is to reduce its dependence on oil imports and achieve fuel self-sufficiency.

Crude Oil Continue Uptrend

Natural Gas Trades in the Green

Natural gas traded on a positive note during the week. It opened its session higher and continued the uptrend during the start of the week. Most of the gains were seen as updated weather forecasting models pointed to increased summer demand in the weeks ahead. During the end of the week, natural gas ended its session in the green.

CURRENCIES

Draghi Comments Bring Losses for Dollar

The dollar traded on a negative note during the week. It opened its session lower on the back of weak global cues and continued to witness losses during the start of the week. Most of the losses came after the ECB meet where Mario Draghi said that no exact date had been set to discuss changes to the ECB's ultra-easy monetary policy. During the end of the week, the dollar continued its downtrend and ended its session in the red.

Dollar Witness Downtrend

Euro Trades on a Positive Note

The euro traded on a positive note during the week. It opened its session in the green and continued the uptrend during the early trades of the week. Most of the gains were seen ahead of the ECB meet. Then a host of positive data aided the euro's rally during the end of the week.

Sterling Witnesses Selling Pressure

The pound traded on a negative note during the week. It opened its session down and extended the fall ahead of the ECB meet. Losses were also seen during the end of the week amid weak global cues.

Safe-Haven Bets Bring Marginal Gains for Yen

The yen witnessed volatile trades during the week. Gains were seen as market participants sought safe-haven bets in the currency after taking cues from weak trend overseas. The currency also rose on the back of a weak dollar overseas. Finally, the yen continued its momentum and ended its session with marginal gains.

Commodities 14th July 20th July % Change
Gold/10 gms 27,996 28,331 1.20%
Silver/kg 36,970 37,881 2.46%
Crude Oil/barrel 3,014 3,037 0.76%
Natural Gas/mmBtu 192.30 196.70 2.29%
Currencies 14th July 20th July % Change
USD / INR 64.55 64.48 -0.10%
EUR / INR 73.71 74.22 0.69%
GBP / INR 83.79 83.50 -0.34%
JPY / INR 57.08 57.47 0.67%

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