How to Profit from Central Bank Policies and GST

The European Central Bank (ECB) left its 1.7 trillion-euro stimulus program unchanged at its policy meeting on Thursday. The governing council of the central bank also stood pat on interest rates and its asset purchases program. It left the main refinancing rate at zero, the deposit rate at minus 0.4%, and asset purchases at 80 billion euros a month.

The consensus at the meeting was that Britain's decision to leave the European Union (EU) poses no immediate danger to the euro-area recovery.

The council stated it expects the key ECB interest rates to remain at current or lower levels for an extended period. It further said that the monthly asset purchases of 80 billion euros are intended to run until the end of March 2017, or beyond, if necessary.

Soon after the council's statement, all focus turned to ECB President Mario Draghi. Market participants were keeping tabs on whether Draghi would announce any technical adjustments to the ECB's quantitative-easing (QE) program.

Draghi, however, disappointed hopes for more QE and kept the plan unchanged until the planned March end-date. He said that the ECB was looking at options to enable it to pursue the money-printing program.

While speaking at a conference, Draghi said he was concerned about persistently low eurozone inflation. Eurozone inflation has fallen short of the ECB's near 2% target for more than three years.

The ECB, in March, announced aggressive moves that lit a fire under European markets. It cut its main interest rate from 0.05% to 0% and its bank deposit rate from minus 0.3% to minus 0.4%. Four long-term loan schemes were also announced, with banks given incentives to boost credit growth with the help of cheaper rates. Borrowing terms under the scheme were as low as minus 0.04%. This meant the ECB would pay banks to take its cash if they could show they were lending it to households and firms. The bank also expanded its quantitative easing program from 60 billion euros to 80 billion euros a month in an effort to boost inflation and revive a stuttering eurozone economy.

So the ECB's recent announcement is just a continuation of the central banks easy money policies. Central banks across the world are trying to prod growth through stimulus measures and near-zero or negative interest rates.

But are these measures viable? Asad Dossani, editor of Daily Profit Hunter, calls these measures the definition of insanity. He has also written on how one can successfully trade such events and build a trading business.

Data released during the week showed that US jobless claims fell to a six-week low last week. The US Department of Labor reported initial jobless claims in the week ending 3 September decreased 4,000 to a seasonally adjusted 259,000. This was recorded as the 79th straight week that claims remained below the 300,000 threshold, which represents a robust labour market.

While the jobs data fuelled optimism for the US economy, the services sector data came in below expectations. Data released during the week showed US services sector activity slowed to a six and a half year low in August. This was seen amid sharp drops in production and orders.

The Institute for Supply Management (ISM) said its non-manufacturing activity index fell 4.1% to a reading of 51.4, the lowest reading since February 2010. The drop from July was the largest monthly fall since the 2008 financial crisis. The ISM reported a majority of companies noted a slowing in their level of business. A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of US economic activity.

This was further negative news for the US economy. Last week, the ISM said its index of national factory activity fell 3.2% to a reading of 49.4 last month. This was the first contraction since February. The index, however, remained above the 43.2 threshold associated with a recession.

While the manufacturing and services sectors remain constrained, sustained labour market strength could push the Fed closer to raising interest rates later this year.

Last month, Fed Chair Janet Yellen voiced optimism about the economy and anticipation that interest rate hikes are ahead. Yellen said that with a firm labour market in the US and with the Fed's outlook for economic activity and inflation, the case for an interest rate hike has strengthened in recent months.

As for our views on the US interest rate, we believe that the market and the Fed place undue importance on just twenty-five basis points (0.25%). And this in turn leads to a loss of central bank credibility. Asad Dossani, editor at Daily Profit Hunter, explained the issue in his article, Twenty-Five Basis Points.

The Fed's stance on rate hikes has fuelled much volatility in the global markets of late. The question is: How can one avoid capital loss amid such volatility? Asad says Don't Fight Easy Money. And to learn how, you can read recent articles from Apurva Sheth - one highlighting some trading principles from Warren Buffett and another explaining how traders can measure their trading performance.

Global indices closed the week on a volatile note after taking cues from the above developments.

Benchmark indices in the US ended the week on a negative note with the Nasdaq Composite ending the week down by 2.36%.

Asian stock markets ended the week on a mixed note with benchmark indices in Japan and Hong Kong ending the week higher by 0.24% and 3.58%, respectively.

GST Bill Becomes a Law in India

Back home, Indian stock markets finished the week with marginal gains. The BSE Sensex was up 0.92% for the week, while the NSE Nifty was up 0.64%.

On the sectoral indices front, realty and consumer durables stocks witnessed maximum buying interest this week. On the other hand, stocks from the IT sector led the losses.

During the week, President Pranab Mukherjee gave his assent to the Constitution Amendment Bill on Goods and Services Tax (GST). This, along with the bill ratified by more than 50% of the state assemblies, makes GST a law.

With this milestone achieved, all eyes are now set on the formation of the GST council.

The GST council is a very important part of the implementation process. It will be the job of the council, which will be two-thirds represented by the states, to decide on the GST rate. Then three GST Bills (Central GST, Integrated GST, and State GST) stating the actual rates will be sent to Parliament and state assemblies for approval. To know more about GST, please read Vivek Kaul's report - GST & You: What the Media DID NOT TELL YOU About the GST.

As for market participants, the question is this: Will the landmark GST Bill make you go out there and buy stocks in large numbers? One of the editions of The 5 Minute WrapUp titled 'GST Approved: Time to Buy Stocks by the Fistful?' answers this question.

In another news update, Mark Mobius, executive chairman, Templeton Emerging Markets Group at Franklin Templeton Investments, said that India is in a takeoff stage and is growing faster than China. The fund manager, in an interview with the Economic Times, also stated that valuations of Indian markets are not looking expensive amid the low interest rate environment.

Our view is that India still needs to improve in many areas. While it is in a takeoff stage and is the fastest-growing economy, many structural changes are still required. Vivek Kaul, editor of the Vivek Kaul's Diary, has written much on the sorry state of India's economy. He has also just launched the Vivek Kaul Letter, which outlines the Indian economy and its many challenges.

Marginal Gains for Indian Indices


The Nifty opened with a huge gap up on Tuesday and a rallied 130 points but ended the week with nominal gains on account of profit booking at higher levels. It seems like the channel line would act as a resistance on an immediate basis and keep prices in check. 8,800 could act as an immediate support while 9,000 could act as a resistance.

COMMODITIES

US Economic Data Fuels Gold Rally

Gold traded on a positive note during the week. It opened up on Monday on expectations that the US Federal Reserve would not raise rates in September. The gains, however, were limited by stronger equity markets during the start of the week. Come midweek, the yellow metal rose to a fresh two-and-a-half-week high. It witnessed buying interest as disappointing US economic data meant that the Fed will keep rates untouched. Gold continued its momentum during the end of the week. It traded on a positive note and ended its Friday’s session in the green.

Gold Witness Gains

Volatile Trades for Silver

Silver witnessed volatility during the week. On Monday, it started on a positive note. However, it failed to maintain this momentum and traded on a mixed note during the rest of the week. Prices fell midweek after taking weak cues from overseas markets. Despite the losses, silver maintained to register gains. It traded on a positive note during the end of the week on the back of weak US economic data.

Crude Oil Spikes on API Data

Crude oil witnessed buying interest during the week. It opened its session on a positive note and went on to extend its uptrend on the back of progressive cues. Prices spiked after the release of inventory data from the American Petroleum Institute (API). The data showed a 12-million-barrel drop in the US crude oil supplies for the week of August 28. This was recorded as the largest drawdown in crude inventories since the 12.4-million-barrel drop reported in March 2013. Along with this, a firm trend in Asian markets coupled with a weaker dollar meant gains for crude oil. Slight losses were seen during the end of the week on profit-booking. However, crude oil ended its session with weekly gains.

Positive Trades for Crude Oil

Natural Gas Ends Higher

Natural gas witnessed volatile trades during the week. It opened its session on a negative note on Monday. Losses were also seen midweek as the commodity extended its downtrend. However, some respite came after the US Energy Information Administration (EIA) data showed lesser than expected supplies of the commodity. The US EIA stated that supplies of natural gas rose 36 billion cubic feet (bcf) for the week ended 2 September. This was below the average rise of 41 bcf expected by analysts. During the end of the week, natural gas witnessed gains and ended its session on a positive note.

CURRENCIES

Dollar Pulled down by Disappointing US Data

The dollar traded on a negative note during the week. It started its session lower than the previous week’s closing and witnessed mixed trades during the start of the week. Losses were seen on the back of disappointing US jobs growth figures for August. Midweek, the dollar continued to trade in the red. Data showing that the services sector in the US stood near a six-and-a-half-year low weighed on the dollar. During the end of the week, the dollar witnessed choppy trades. It finally finished with weekly losses.

USD Witness Volatility

Euro Registers Gains as ECB Holds Steady

The euro witnessed volatility during the week. While it opened its session on a negative note, it managed to close the week with gains. Losses during the start of the week were seen amid weak global cues. However, the currency rose after the ECB stood pat in its monetary policy meeting. It maintained its upward trend against major currencies on Friday and ended its session in the green.

British Manufacturing Data Weighs on Sterling

The sterling witnessed choppy trades during the week. While it opened lower, the currency witnessed marginal gains during the start of the week. The pound witnessed most of the losses after data showed British manufacturing output fell at the fastest pace in a year in July. Manufacturing output fell 0.9% on the month, higher than the 0.4% decline forecasted by economists. During the end of the week, sterling traded on a mixed note and ended its session in the green.

Yen Rises After BoJ Deputy Governor's Comments

The yen witnessed gains during the week. Losses were seen on Tuesday amid weak global cues. However, the currency witnessed buying interest as a safe haven asset during the end of the week. Market participants increased their exposure to the currency after a Bank of Japan (BoJ) deputy governor gave few fresh clues on the central banks' monetary stimulus this month. BoJ Deputy Governor Hiroshi Nakaso said the central bank would pursue its massive stimulus program by striking the right balance between its powerful policy effects and potential adverse effects on financial intermediation. This helped the yen register gains and end the session on a positive note.

Commodities 2nd Sep 9th Sep % Change
Gold/10 gms 30,920 31,217 0.96%
Silver/kg 46,015 46,194 0.39%
Crude Oil/barrel 2,975 3,080 3.53%
Natural Gas/mmBtu 187.20 188.30 0.59%
Currencies 2nd Sep 9th Sep % Change
INR / USD 67.08 66.86 0.33%
INR / EUR 75.10 75.38 -0.37%
INR / GBP 88.93 89.04 -0.12%
INR / JPY 64.83 65.15 -0.49%

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