Tuesday, February 8, 2011

Indian Stocks Falter Again, Dropping 1.5% to 7 Month Low as Chinese Raise Interest Rates and Brazilian Monthly Inflation has Highest Spike in 6 Years

In the "nothing matters until it matters" category a cacophony of news overnight from the BRIC countries.   Inflation fears continue to fan the flames overseas and the global hot money is on the move. 
  • For the week to Feb. 2, BRIC equity funds had net outflows of $316 million, a 10th consecutive week of redemptions.
With institutional speculators utilizing easy money continuing to surge into commodities.... until some sort of blow off top occurs, I am not sure that any of the actions by Asian central bankers are going to succeed in stopping politically sensitive food inflation.

First from India, the Sensex has fallen 1.5% overnight to a 7 month low @ 17,775.  This brings it almost exactly in line with the late August 2010 low - most likely hours before Ben Bernanke sounded the all clear on world wide speculation in anything that moves at Jackson Hole, Wyoming.  Technically this is a very key level, because if it breaks you could be looking at another 500 points down easily before the next light support.  This chart is one day delayed.
  • Analysts said with foreign funds pulling out more than $1 billion from Indian equities since the start of January, the outlook for the near term remained subdued.

India is the worst of the BRIC's this year, already dropping 13.3% in just some 6 weeks.  Ouch.   For all of 2010, the index was up 17% so much of that has now been erased.  Aside from inflation fears, there is a drama over a bribery scam in relation to telecom spectrum licenses.
  • “Cost pressures remain a key risk to earnings and market momentum. Although top-line growth has kept pace with inflation in nominal terms, pressure on bottom lines from rising raw-material prices, wages and interest costs are intensifying across sectors,” Nomura analysts led by Prabhat Awasthi wrote in a report Tuesday. 
  • A recent monthly release from HSBC showed India’s composite purchasing managers’ index climbed to 59.6 in January from 58.9 in December, but with “input-price inflation rising at the strongest rate in the history of the series.”

Brazil has not been a party either, with a loss of just under 6%.  The country reported that it's monthly inflation gauge jumped the most in 6 years.
  • Brazilian officials say inflation in January was the highest monthly jump in almost six years. That increases worries Brazil's economy is overheating.  The government's IBGE statistics bureau says Tuesday that January inflation was 0.83%. That's the biggest monthly jump since April 2005.
The monthly inflation pace increase in Brazil is pretty dramatic - in December it was +0.63%, in January +0.75% and now it has jumped to +0.83%.  February's figure would be 10% annualized versus the official target of 4.5% inflation.

China raised interest rates overnight as investors return from Lunar New Year as it tries to deal with its own banking sins, plus the ultra easy money moving around the globe.  Shanghai is slightly negative for the year.
  • China's central bank raised interest rates for the second time in just over a month in a bid to dampen high inflation and guide blistering economic growth to a sustainable level. The People's Bank of China announced Tuesday on its website that the benchmark 1-year deposit rate would rise by a quarter percentage point to 3% and the 1-year lending rate would increase by the same amount to 6.06%. The increases are effective Wednesday.
  • Its last rate hike came on Christmas Day, when the bank raised both benchmark rates by a quarter point. 
  • China's leaders have sought to cool surging inflation that could pose a threat to political stability.  Rising prices are especially sensitive in a country where poor families can spend up to half their incomes on food. Higher incomes have helped to offset price hikes, but inflation undercuts economic gains that help support the ruling Communist Party's claim to power. 
  • China's battle with inflation marks a sharp contrast with the United States, Europe and Japan, where growth has been muted in the aftermath of the financial crisis.
  • Chinese leaders ordered a shift from easy credit to a "prudent monetary policy" in 2011 in a planning report issued in December.  Last year's rapid growth was driven by a flood of investment in property and other areas. Analysts have urged Chinese authorities to do more to rein in the lavish lending by state-run banks that is driving investment, a large chunk of which is believed to be in speculative property deals.  Authorities are also considering ways to penalize banks for flouting orders to cut back lending.
  • Borrowing for real estate development and other projects is the lifeblood for the sales by local governments of land use rights that provide a huge share of their revenues. Such sales rose 70 percent in 2010, helping push property prices 6.4% higher compared with a year earlier.
  • A huge pool of nonbank financing nearly doubled the amount of money available for investment last year, much of it "off balance sheet" lending whose exact scale is unknown.  (hmmm.... more "off balance sheet" accounting ala Citigroup, Enron and the like - sounds vaguely familiarI am sure it will end well.)

Last but not least, on the plus side Russia aka "the country which institutional investors treat as an oil ETF" is up 8.7% for the year.

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