Has the stimulus withdrawal begun?

Wed, 13 Jan Pre-Open

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Yes, at least as far as China is concerned. Yesterday, the dragon nation raised the minimum reserve requirement for its banks by 0.5%. The move is an attempt to stop inflation in its tracks and prevent formation of big asset bubbles.

India too is expected to follow suit. RBI has been concerned with rising food prices and its impact on overall inflation for quite some time now. It is also mindful of the abundant liquidity in the system, thanks in part to its own relaxation of reserve requirements early last year and in part due to surging capital inflows into India. The fact that the Indian industrial output grew at its fastest pace in more than two years in the month of November 2009 also allays any fear with respect to economic slowdown. Thus, the stage seems to be perfectly set for the country's central bank to at least hike reserve requirement if not interest rates in the soon to be held monetary review exercise.

However, we wonder whether such measures would help both the nations achieve desired results unless the developed nations, most of all the US follows suit. And such a possibility looks remote indeed. US unemployment is still nowhere close to comfortable levels and this is the single most important factor that would force the US Fed to continue with its loose monetary policy. Thus, cheap money emanating from the US will continue to look for higher yields and risky asset classes like Indian and Chinese equities.

This scenario also presents a dilemma for Indian investors. It is quite possible that continued surge in capital inflows could take stock markets even higher. But investors fall for this buoyancy at their own peril. It should be noted that that risk reward equation from a one to two year perspective is not that favorable at the current juncture and hence, please take the fundamentals of the underlying company and its valuations into proper account while investing. For if the capital flows start looking the other way, one does not want to be caught on the wrong foot!

The oil that could give Saudi Arabia a run for its money
Commodities is an interesting space. And crude oil even more so. Reduce supply by a couple of million barrels per day and prices could skyrocket. And it works the other way as well. Increase supply by the same amount and prices could well cool down considerably. Now, imagine a region having Saudi Arabia like reserves being bought into play over the next few years. We are talking about oil ravaged Iraq. As per CNN Money, the country's oil industry is on the verge of a major reconstruction and could start pumping as much as 11 million barrels per day, a number that is just behind Saudi Arabia and Russia, within the next few years.

Forget 11 million barrels, even if it manages to achieve a steady supply of a mere 20% of that amount, it can have a major impact on crude oil prices. However, it looks unlikely that OPEC would let Iraq spoil the oil market. Furthermore, depressing prices more than required would also hurt Iraq's own interests. At best, what we can hope for is reduced volatility in oil prices.