Liquidity Squeeze in Stocks & Commodities
By: Amit Bhushan Date: 7th Sept. 2015
The impending but predictable hike in USD interest rates guidance from its central bank is cause of the current turmoil in stocks and commodities, worldwide. A large number of central banks world-wide, which invested in the USD currency, seem to be engaged in Open Market Operations to re-check their positions in currency denominated bonds, derivatives etc. This seems to be leading to a temporary withdrawal of liquidity from stocks, commodities and derivatives from most emerging as well as some relatively more developed markets. Some of these markets are impacted by even a small withdrawal of ‘foreign’ monies and large scale actions by central banks to review positions across multiple currency bonds, derivatives has potential to suck ample amount of liquidity from the system for a while. The taper in prices of risky assets is likely to result in more crowding at the counters selling Bonds of ‘’Risk-free” variety and these are likely to be off loaded by the central banks, especially those keen to shrink their balance sheets.
The volatility is likely to be accompanied by rising interest rates that is likely to soon push major corporations to take a harder look at their ‘’assets/projects” and identify those that are being sustained just on account of cheap credit. These may be more vulnerable in future when interest rates may go up further. This would then trigger further reorganization of activities and a cause of concern for the more developed markets. The hunt for high IRR projects or high ICOR economic activities, sunrise sectors and companies etc. is likely to be a bigger draw soon as corporate reorganization is likely to be shaped around such activities and projects.
The low valuation of stocks of such prized assets across emerging markets especially those dependent on primary commodities exports or where solving current economic bottlenecks is a political priority presents a huge opportunity. This especially where political, financial and economic stability can be reasonably expected; are likely to benefit from such chain of events. What these markets will need to convince investors about, is regards safety of assets/holdings, transparency of accounting and valuations, stability of policies or clear direction, better implementation mechanisms for contractual obligations, availability of judicial remedies etc. etc. The stability of consumers’ confidence and growth potential for ventures will come next in line of considerations for investors.
The businesses and political leadership of course prefer to deal with such issues in piecemeal fashion i.e. project by project rather than develop suitable laws, policies and structure; as such things keep them in business. It helps that generally no one person has capabilities to draft a comprehensive proposal encompassing the benefit for ‘’all’’ and the political bosses are supposed to take actions only on what is proposed, and not use/apply their own brains. It also helps that “opposition” keeps trumpeting the charge of “dictatorship” supporting the need of “not applying one’s own brains” by Your majesties in politics. So instead of convincing public about their actions/results and taking their verdict, the politicos become more adept to blaming public about lack of proposals.
Then we have the commercial news media to do the rest. They of course play by some of their own whims and also by the fancies of their ‘’backers including financial backers”. So it is only the merit of “proposals” as well as bhakti of political leadership (including some of those in opposition) is what one generally gets to hear/read, while questions are best avoidable.
By: Amit Bhushan Date: 7th Sept. 2015
The impending but predictable hike in USD interest rates guidance from its central bank is cause of the current turmoil in stocks and commodities, worldwide. A large number of central banks world-wide, which invested in the USD currency, seem to be engaged in Open Market Operations to re-check their positions in currency denominated bonds, derivatives etc. This seems to be leading to a temporary withdrawal of liquidity from stocks, commodities and derivatives from most emerging as well as some relatively more developed markets. Some of these markets are impacted by even a small withdrawal of ‘foreign’ monies and large scale actions by central banks to review positions across multiple currency bonds, derivatives has potential to suck ample amount of liquidity from the system for a while. The taper in prices of risky assets is likely to result in more crowding at the counters selling Bonds of ‘’Risk-free” variety and these are likely to be off loaded by the central banks, especially those keen to shrink their balance sheets.
The volatility is likely to be accompanied by rising interest rates that is likely to soon push major corporations to take a harder look at their ‘’assets/projects” and identify those that are being sustained just on account of cheap credit. These may be more vulnerable in future when interest rates may go up further. This would then trigger further reorganization of activities and a cause of concern for the more developed markets. The hunt for high IRR projects or high ICOR economic activities, sunrise sectors and companies etc. is likely to be a bigger draw soon as corporate reorganization is likely to be shaped around such activities and projects.
The low valuation of stocks of such prized assets across emerging markets especially those dependent on primary commodities exports or where solving current economic bottlenecks is a political priority presents a huge opportunity. This especially where political, financial and economic stability can be reasonably expected; are likely to benefit from such chain of events. What these markets will need to convince investors about, is regards safety of assets/holdings, transparency of accounting and valuations, stability of policies or clear direction, better implementation mechanisms for contractual obligations, availability of judicial remedies etc. etc. The stability of consumers’ confidence and growth potential for ventures will come next in line of considerations for investors.
The businesses and political leadership of course prefer to deal with such issues in piecemeal fashion i.e. project by project rather than develop suitable laws, policies and structure; as such things keep them in business. It helps that generally no one person has capabilities to draft a comprehensive proposal encompassing the benefit for ‘’all’’ and the political bosses are supposed to take actions only on what is proposed, and not use/apply their own brains. It also helps that “opposition” keeps trumpeting the charge of “dictatorship” supporting the need of “not applying one’s own brains” by Your majesties in politics. So instead of convincing public about their actions/results and taking their verdict, the politicos become more adept to blaming public about lack of proposals.
Then we have the commercial news media to do the rest. They of course play by some of their own whims and also by the fancies of their ‘’backers including financial backers”. So it is only the merit of “proposals” as well as bhakti of political leadership (including some of those in opposition) is what one generally gets to hear/read, while questions are best avoidable.