Debt Overhang Will Lead to Another 2008-Like Crisis

US data coupled with the IMF report fuelled most of the volatility in global financial markets this week. Back home, share market participants were busy gauging the RBI's stance on inflation and policy interest rates.

The International Monetary Fund (IMF), in its recently published report, stated the global debt has reached a record high in history. The global debt currently stands at 225% of the world gross domestic product (GDP). Also, two-thirds of this, which amounts to about US$100 trillion, is private sector liabilities. The conclusion of the report was that rising debt can be a substantial impediment for the already tepid global growth and can heighten the risk of financial crises.

The chief problem driving this debt binge is the work of central banks and their credit policies. The central banks have been at it since 2008. To recover from the global financial crisis of 2008, central banks started framing unconventional monetary policies. They went on printing money and lowering interest rates. As central banks prodded growth through stimulus measures and near-zero interest rates, companies and individuals borrowed more. The result is the massive debt pile we see today.

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In another news, filings for US unemployment benefits fell last week to the second-lowest level since 1973. This was seen as employers showed scant willingness to fire workers amid a tightening labour market.

As per the data, jobless claims dropped by 5,000 to 249,000 in the week ended 1 October. Also, the continuing claims declined to the lowest level since 2000. Filings were just a hair above the four-decade low of 248,000 from April. All eyes are now set on the US Labor Department's employment report that may encourage the Fed to raise the benchmark rate before the end of the year.

Last month, the US Federal Reserve left interest rates unchanged. However, citing labour market improvements, it strongly signalled that it could still tighten monetary policy by the end of this year. Fed Chair Janet Yellen said she expected one rate increase this year if the job market continued to improve and no new major risk arose.

In the currency markets, the pound witnessed one of its worst times in history on Friday. It plunged to hit a new 13-year low against the US dollar in a flash crash triggered by thin liquidity.

The currency tanked as much as 6% as traders scrambled to assess the cause of the heavy selling. As per the news, it fell to US$1.1819 in early Asian hours, hitting its lowest level since 1985 when it hit US$1.0520. This was the pound's most aggressive fall since the Brexit vote on June 24.

Some suspected the fall was on the back of revived fears of a 'hard Brexit' policy. As per an article in the Financial Times, French President Francois Hollande recently said the United Kingdom had to suffer the repercussions of its decision to leave the European Union to maintain the fundamental principles of the institution.

These comments were followed by British prime minister Theresa May. In a speech during the Conservative party's annual conference earlier this week, Theresa May stated that the UK would leave the EU by 2019. May also said that the UK would become a 'fully independent, sovereign' country, suggesting that a 'hard' Brexit was to be expected.

The above comments have added to the ongoing volatility in the global markets. One can expect further losses on any fresh triggers on these topics.

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Global indices ended the week on a mixed note after taking cues from the above developments. Stock markets in the US witnessed losses (down 0.4%) for the week. European share markets also ended their week in the red on the back of Brexit concerns. Asian markets ended their weekly session on a positive note.

RBI Cuts Repo Rate by 25 Basis Points

Back home, Indian share markets finished the week with gains. The BSE Sensex was up 0.70% for the week, while the NSE Nifty was up 1%. On the sectoral indices front, stocks from oil and gas sector witnessed maximum buying interest. The oil and gas index hit eight year highs and was among the best performer during the week. The worst performer for the week was IT index, down by 1.4%.

The Reserve Bank of India (RBI) cut interest rates by 25 basis points on Tuesday. The Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel, voted unanimously on the decision. This was in contrast to the more hawkish stance of his predecessor, Raghuram Rajan. The rate now stands at 6.25%.

The logic behind the rate cut, as per the RBI, is slowing inflation. The MPC stated it believes that food inflation momentum has moderated and opened up space for policy action.

In another news update, the International Monetary Fund (IMF), in its latest assessment, increased India's growth forecast to 7.6% for the present year and the next year as well. According to the IMF, the country has shown a strong recovery benefitting from large improvement in terms of trade, effective policy actions, and external conditions. These forecasts will mean that India will grow at a much faster rate than China, which the IMF expects to grow less than 7% each year.

However, India should not rest on its reportedly high GDP numbers. Structural reforms are of the essence here. There is a need to resolve the huge debt of power distribution companies. Additionally, labour market reforms are essential to capitalise on the country's demographic dividend. Since banks play an important role in providing credit to the economy, measures must be taken to strengthen the bank balance sheets of weak public sector banks. All of these factors and more are the need of the hour for India to truly keep shining in the long term.

Nifty Logs 1% Weekly Gains

Bulls threw up a surprise punch earlier in the week by bouncing back more than 100 points on Monday. Markets were in a cheerful mood for the first two days of the week, but bears caught up soon and pulled the index back from the weekly high of 8,807. The index finally ended the week with gains of about a percent at 8,695. Markets are likely to trade in a range on a lackluster note on an immediate basis due to a short trading week.


Upbeat US Data Weighs on Gold

Gold witnessed selling pressure most of the week. It opened its session in the red and went on to extend losses. Prices fell due to a firm dollar and a gain in equities. Also, the yellow metal lost its safe-haven appeal as concerns about Deutsche Bank's health eased. Midweek, gold fell to its lowest in two weeks as the dollar gained strength on upbeat US economic data and weighed on gold. During the end of the week, gold traded on a mixed note. Positive cues from global markets helped gold trade in the green. However, the gains were limited as a robust US jobs data weighed on gold. On Friday, gold was headed for its worst weekly decline in nearly a year on increased expectation of a Fed rate hike by the year end.

Gold Trades in the Red

Silver Mimics Gold

Silver traded in tandem with gold for the week. It opened in the red and went on to extend its downtrend. Most of the losses were seen on the back of a weak trend in precious metals overseas. The firm dollar and US data also weighed on silver. Finally, silver traded in the red and ended its session on a negative note. On the topic of silver, Dan Denning, in Vivek Kaul's Diary, offers some insight on when silver does better than gold.

Crude Oil Aided by OPEC Deal and Easing Inventory Levels

Crude oil extended its uptrend from last week and traded in the green. While it opened its session lower, it managed to trade on a positive note during the rest of the week. Losses during the start of the week were seen on the back of worries about high production levels of crude oil. Midweek reports stated a draw in US fuel inventories. This data aided crude oil prices and helped the commodity trade on a positive note. Also, the OPEC deal struck last week continued to help crude oil. During the end of the week, crude oil continued its uptrend and ended its session in the green.

Crude Oil Inches Upward

Natural Gas Trades in the Green

Natural gas traded on a positive note for the week. It opened its session in the green on Monday. Gains were also seen midweek. Slight losses were seen during the end of the week. This came after the US Energy Information Administration (EIA) reported that supplies of natural gas rose 80 billion cubic feet for the week ended September 30. Despite these losses, natural gas managed to end its session with weekly gains.


Dollar Witness Buying Interest

The dollar traded on a positive note for most of the days during the week. It opened its session up on Monday. Most of the gains were seen on the back of upbeat US economic data. The dollar maintained its momentum through the end of the week. It gained on expectations of a Fed rate hike this year and ended its session in the green.

Volatile Trades for USD

Euro Surges to a Five-Year-High Against Sterling

The euro witnessed volatility While it opened its session on a positive note, losses were seen midweek. However, most of the respite for euro came during the end of the week. The currency surged to a five-year high against the pound. The rally was also aided by rising eurozone government bond yields. Finally, the euro witnessed mixed trades during the end of the week on firm dollar overseas. It ended its session with marginal losses against the rupee.

Sterling Plunges to a New 13-Year Low

The sterling took most of the brunt of selling pressure this week, plunging to hit a new thirteen-year low against the US dollar. Some suggest that it was a flash crash triggered by thin liquidity. Further, French President Francois Hollande's comments could have also led to the crash. During the end of the week, the euro went on to trade in the red and ended its session with weekly losses.

Yen Witness Losses

The yen traded on a negative note for the week. It opened down on Monday. Most of the losses were seen on the back of a firm dollar overseas. During the end of the week, the yen continued its downtrend and ended its session on a negative note.

Commodities 30th Sep 7th Oct % Change
Gold/10 gms 30,981 29,578 -4.53%
Silver/kg 45,726 41,865 -8.44%
Crude Oil/barrel 3,212 3,323 3.46%
Natural Gas/mmBtu 194.00 212.40 9.48%
Currencies 30th Sep 7th Oct % Change
INR / USD 66.87 66.85 0.03%
INR / EUR 74.79 74.54 0.33%
INR / GBP 86.86 82.72 4.77%
INR / JPY 66.12 64.53 2.40%

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