When the Fed meets during the coming week it could fire the first salvo on hiking Fed rates by 25 basis points in what could be the first in a series of 3 to 4 rate hikes due to sharply higher inflation. Futures markets are almost overwhelmingly betting on a 25 basis points rate hike this week. The Fed and the US government have been at pains to explain to the markets that any Fed rate hike will not be at the cost of the nascent growth that the US economy has been witnessing. Fed was originally supposed to hike rates 3 times but now the consensus seems to be building for 4. EMs is spooked on capital outflows.
In its plenary session the Congress Party promised to impose a 5% cess on the 1% richest Indians, in what may seem like manna for the large middle classes of India. This cess was intended to be used to create the National Poverty Alleviation Fund. Congress also promised to increase the Rural Employment Guarantee earnings of the rural people from Rs.7,200 per year to Rs.18,000 per year, apart from liberal farm loan waivers and interest-free loans to farmers. Congress also spoke on the provision of social security for the farmers at old age. Parties are keen to woo the farmers ahead of 2019 elections.
The G-20 nations are worried that the global trade tensions and tight money conditions could actually lead to the economy recovery faltering. Since the sub-prime crisis 10 years ago, the world economy has seen the fastest pace of expansion helped by cheap money. According to the G-20, 2 things may spook this recovery. Firstly, the trade war triggered by Trump by imposing tariffs on steel and aluminium could lead to retaliatory tariffs and also lead to a currency war. Additionally, with interest rates near zero, central banks the world over are look at tightening rates which could also be a spoiler.
The legal proceedings against Vijay Mallya in the UK Courts took a new dimension after the British Judge admitted to major procedural lapses by Indian banks in sanctioning loans and connivance in creating NPAs. The judge raised the topic of penalization of bank officials in this regard whilst it was hearing the case for the extradition of Vijay Mallya to India to face criminal proceedings. Mallya’s counsel, Clare Montgomery, opined that most of the evidence presented by the Indian government could have been fabricated and hence not admissible. The counsel maintained that losses of Kingfisher were genuine.
At a time when over 50,000 farmers protested in Maharashtra and Mr. Modi clarified on the 1.50 times MSP scheme, there appears to be a new problem of plenty in the Indian sugar industry. The story of how there was enough sugar in warehouses to make 3 chocolate cakes for every person in the world has spooked markets. Sugar prices have been falling and most sugar producers in India have seen their stock prices fall by over 50% in the last few months. Sugar Futures in New York have already touched the lowest level since late 2015. Hedge funds continue to be highly short on sugar prices. Citigroup expects a global sugar surplus of 11.1 metric tonnes and the woes of the sugar industry were obvious when Mr. Murkumbi of Renuka Sugars largely sold out his stake citing weak outlook for sugar industry.
With Xi of China almost voted back to power for life and Putin set to win his fourth term in Russia, the West could have a serious problem dealing with two strong personalities from the East. Putin has already been in power for 18 years and is the longest serving leader since Josef Stalin. The US is already planning sanctions on Russia while UK had almost withdrawn diplomatic relations with Russia over their nerve gas attack on the former Russian ambassador. A victory will mean that Putin will continue till 2024 and it only lead to worsening of ties with the West. Global geopolitics to be watched!
