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Risk Aversion Hits Global Financial Markets - US Treasuries, Gold & Yen Rally & Fears About European Banks Escalate.


It was a thin week for data releases in Canada; building permits in December, jumped sharply higher by 11.3% well above economist's consensus at 5.5%. This number has to be seen in totality with the 19.9% plunge in November. For the full year 2015, building permits totaled C$85 billion, which was flat over previous year, but non-residential construction declined by 6.3%, which was set-off by the red hot residential segment which increased by 4.4%. Teranet-National Bank Composite House Price Index, which measures price changes for repeat sales of single-family homes, dipped by 0.1% in January from December. As per the report a decline in January has happened only three times in the last 17 years. Though as compared to the previous January, prices were up still up 5.9%. As per Statscan, new home prices in Canada, increased by 0.1% in December from November, with the red hot housing markets of Toronto & Vancouver leading the gains. This rise was slightly lower than the 0.2% expected by economists.

In interest rate markets, Canadian 10-Year rate briefly traded below the 1% rate for the first time. Central Bank interest rates have turned negative in Switzerland, Eurozone, Japan, Sweden (which cut rates further deeper into negative territory this week) & Denmark meaning about a third of the world's GDP is in negative territory. There has been talk this week about how negative rates would work in the US & also Canada. In Canada with rates are 0.50% if the economy shows further weakness it could follow these other countries into negative territory. As the Canadian interest rate curve dips lower, banks will have post gains in the bond portfolio and this will offset some of the other headwinds that the banks are facing.

As per data compiled by Bloomberg, January was the worst month for IPO's since 1995. February has also started off to a difficult start with Therapure Biopharma Inc. postponing its IPO due to poor market conditions. The 2.43% gain on Friday helped trim losses for the week as crude oil posted sharp gains, pushing the large energy sector higher. Gold stocks again posted sharp gains, piggy riding the rally in gold prices.

Prime Minister Justin Trudeau mentioned that the fiscal deficit for next year will exceed "very likely" the $10 billion maximum goal. Finance Minister Bill Morneau also mentioned that with weak economic growth & downward revision of growth forecasts for the next few years, a more imposing deficit seems inevitable. This fiscal stimulus could cushion some of the headwinds from low commodity prices which have dragged down exports and GDP growth. The Canadian Dollar will also be under pressure due to this fiscal strain and the downward bias will continue. This week the Canadian Dollar seemed to de-couple from mirroring moves in Crude Oil price which had gut wrenching volatility. The weak US Dollar globally also had a firming bias on the Canadian Dollar.


In India equities had their worst weekly loss since the days of the financial crisis in 2009 as global risk aversion hit equity markets hard. With the Chinese equity markets closed this week on account of Chinese New Year, Indian equities bore the brunt of selling by Global Fund Managers. Foreign Institutional Investors (FII's) liquidated equities worth $420.48 million this week. Since the start of this year FII's have sold $2.145 billion worth of Indian equities. Indian Public Sector Banks which are bogged down by large non-performing loans continued to report poor results; the fifth largest bank by assets Canara Bank reported an 87% plunge in Q4 net profits & IDBI Bank on the other hand reported large losses. Corporate earnings for quarter ended December have not been impressive, especially for large cap stocks and it does not resonate well with the over 7% GDP growth reported.

The Indian Rupee also closed at record lows having surged past the psychological important level of 68.00 on Wednesday. If the global "risk off" environment continues we could see the Rupee trading at levels over 70.00 in the coming weeks. The pace of fall in the Indian Rupee will be determined by RBI's stance on cushioning the fall.

Inflation in India hit its highest level in 17-months at 5.69%. The cause of inflation at the retail level is again food inflation with the Consumer Food Price Index increasing by 6.85%. Within the food component; prices of pulses & products were up 43.32% & spices were up 10.56%. As has been in the past, inflation is due to "cost push" and not due to too much liquidity in the system. If inflation edges further higher, we could see probability of rate cuts by the RBI reduce further. In the current scenario, with headwinds from global risk aversion hitting Indian Financial Markets, a rate cut could help in bolstering confidence. The other reason for monetary stimulus is the anemic recovery that we have witnessed in the large industrial economy. Industrial production fell for the second consecutive month with the capital goods sector contracting by 19.7%.


Global financial markets received blows from different directions this week. To start off the week a dip in Chinese FX Reserves reminded the world of Chinese risks to global growth after the PBoC has steadied both the onshore CNY and the offshore CNH against the US Dollar over the last two weeks. Next in line was a plunge in the value of bonds of one of Europe's largest banks; Deutsche Bank. After closing at Euro 22.52 in December, the stock has lost nearly half its value with market rumors touting this to be the next "Lehmann Brothers" as it reported weaker than expected results and there are doubts about the restructuring plan approved in October last year. The question whether the bank can continue to fund itself became so acute that the bank had to come out with an official statement that they are well funded to repay bonds due in April. They also announced a buyback of its debt to negate market fears about funding. Credit Suisse was another European bank that has lost significant market cap over the last month, so have several other banks across Europe. Fears about solvency of banks was the highest in Italy, where the EU estimates that about 17% of loans held by Italian Bank are in danger of turning bad. Italy's largest bank Unicredit has also lost nearly half its market capitalization since end of December. Chinese markets were closed this week on account of Chinese New Year so watch out on Monday as the Chinese market plays catch up.

The massive amount of risk aversion in markets resulted in few of the markets "safe haven" assets zooming higher. The Japanese Yen which is one of the markets favorite assets in times of turmoil gained 3.1% trading a low of 110.98. The Japanese Yen is down nearly 10 big figures in the last 2 weeks, when it had traded a low of 121.70 after BoJ moved interest rates into negative territory. Gold was another asset that investors flock to in times of stress and it posted gains of 5.50% & in addition to risk aversion, dovish comments from FOMC Chair Janet Yellen also helped propel Gold prices higher. US Treasuries with its vast size and liquidity was the third asset that posted large gains. The 10 year US Treasury yield traded a low of 1.53% on Thursday, which was last seen in Jan 2015

Chinese foreign exchange reserves dropped by $99.5 billion in January to $3.23 billion. This was the second highest monthly drop after December's $107.9 billion. FX reserves have fallen by $763 billion since hitting all time high in June 2014 at $3.993 trillion. The pace of depletion in FX Reserves has accelerated in the last 6 months as reserve balances fell by $420 billion. In January after the initial drop in the Chinese Yuan it has held steady at around 6.57-58 levels due to intervention by the Chinese Central Bank, PBoC & it was rumored to have sold US Dollars in the offshore CNH market in Hong Kong also. China has traditionally been a net importer of capital but due to the slowdown in the economy, it is witnessing capital flight for the first time and if the pace of reserves depletion of January continues we could see reserves falling by about $1-1.2 billion and this could prompt some further capital control measures. The effect of this intervention in the money markets is that as the PBoC sells US Dollars in the market it sucks out CNY out from the banking system. The PBoC is injecting liquidity into the Yuan money market to replenish this. Since the start of the year, PBoC has injected about $260 billion into the system.

Crude Oil prices had huge moves on either side and the volatility was gut wrenching. A report by International Energy Agency (NASDAQ:IEA) which mentioned that supply will exceed demand in the first half of the year by a quantity "even greater" than initially expected sent crude prices lower. On Wednesday, When US Energy Information Administration data revealed that inventories at a record high 64.7 million barrels sent crude oil prices to 12 year lows. This all changed on Wednesday when the UAE energy minister was quoted stating that OPEC is ready to cut production produced a sharp upward rally. On Friday, crude oil prices rallied more than 12% higher after a media report that OPEC could be ready to discuss a production cut.

In US, FOMC Chair Janet Yellen's testimony sent the US Dollar screaming lower as she sounded cautious about the future path of interest rates given the increased risk due to falling stock prices and turbulence in global markets which could impede growth. The key statement that spooked markets was "Financial conditions in the United States have recently become less supportive of growth." She also warned that this could impact economic activity and labor market which continues to be strong currently. The other question which spooked markets was the response to a question on negative rates, when Yellen replied "We're taking a look at them… I wouldn't take those off the table."

Compiled & Researched by: CA Shailesh N. Mulki

Disclaimer: This is not a research report and the views and information contained herein are the personal views of the author. These should not be taken to constitute advice or recommendation.