Option reading index for today is (-) 0.48 down from last trading figure of (-) 4.45 suggests buying interest.
On Japan's economy, Reader Alphabet1 has raised a valid question...what direction could equities go considering macro concern about Japanese Insurance companies liability claims, which in turn could propel selling of Euro & US Bonds which they have been picking up from last year. its impact on asset classes.???
My answer
It is very difficult to write entire thing in one blog post with time constraints. It involves analysis of currencies, trade balance figure, balance of payments position, type of reinsurance contracts entered into, location of the re-insurer as normally re-insurer is located in Europe etc etc., Some concerns will always arise during this kind of situations but normally key factor is reinsurance claims. Reinsurance companies always have a pool of risk sharing wherein insured risk is shared among major participants. Insurance companies by nature of operations and by virtue of governmental regulations need to invest majority of their investing surplus in government treasury securities..in indian parlance it is known as treasury bills & government securities...The price of this securities has inverse relationship with yield. (Please refer YTM function in excel..Yield to Maturity). The price change takes place in relation to changes in interest rates which is a function of inflation. Sometimes on drastic situations like this, seller may throw away bonds to encash. This market is mostly dominated by big banks and financial institutions and hence to find buyer during this situations is very difficult as bids will be very low and seller has no option but to hit the available bids to close the deal. This will distort the yield curve based on which many products including complex derivatives are being derived in US and other European markets. To avoid this distortion, probably government through arms may intervene to absorb the quantum selling to maintain the equilibrium of yield curve. (yield curve based on spot prices is known as spot curve). In case of other assets, primarily equities may see decline in prices due to panic selling which may bring the related markets down. The next aspect is currency as Japanese money is being borrowed and invested across global markets. This will bring currency volatility as normally local currency depreciates reflecting the degrading of economic conditions, The Japanese Banks have to bail out local economy by pumping in enough liquidity which will fuel inflation. The present deflation may well turn out to be inflation oriented resulting in change in interest rate scenario. Any move towards increase in interest rates may involve major selling in global markets as money withdrawals will start.
All the above analysis is only hypothetical believing the companies are being insured whereas in reality, natural disaster like this is always out of coverage as it requires special tariff as the risk is enormous. So the possibility of liability claims assuming monster proportion to affect major financial markets is less..
Please read the articles at Businessstandard - Estimating-insured-losses-in-japan-is-difficult
Please click on the charts to see full picture.
On Japan's economy, Reader Alphabet1 has raised a valid question...what direction could equities go considering macro concern about Japanese Insurance companies liability claims, which in turn could propel selling of Euro & US Bonds which they have been picking up from last year. its impact on asset classes.???
My answer
It is very difficult to write entire thing in one blog post with time constraints. It involves analysis of currencies, trade balance figure, balance of payments position, type of reinsurance contracts entered into, location of the re-insurer as normally re-insurer is located in Europe etc etc., Some concerns will always arise during this kind of situations but normally key factor is reinsurance claims. Reinsurance companies always have a pool of risk sharing wherein insured risk is shared among major participants. Insurance companies by nature of operations and by virtue of governmental regulations need to invest majority of their investing surplus in government treasury securities..in indian parlance it is known as treasury bills & government securities...The price of this securities has inverse relationship with yield. (Please refer YTM function in excel..Yield to Maturity). The price change takes place in relation to changes in interest rates which is a function of inflation. Sometimes on drastic situations like this, seller may throw away bonds to encash. This market is mostly dominated by big banks and financial institutions and hence to find buyer during this situations is very difficult as bids will be very low and seller has no option but to hit the available bids to close the deal. This will distort the yield curve based on which many products including complex derivatives are being derived in US and other European markets. To avoid this distortion, probably government through arms may intervene to absorb the quantum selling to maintain the equilibrium of yield curve. (yield curve based on spot prices is known as spot curve). In case of other assets, primarily equities may see decline in prices due to panic selling which may bring the related markets down. The next aspect is currency as Japanese money is being borrowed and invested across global markets. This will bring currency volatility as normally local currency depreciates reflecting the degrading of economic conditions, The Japanese Banks have to bail out local economy by pumping in enough liquidity which will fuel inflation. The present deflation may well turn out to be inflation oriented resulting in change in interest rate scenario. Any move towards increase in interest rates may involve major selling in global markets as money withdrawals will start.
All the above analysis is only hypothetical believing the companies are being insured whereas in reality, natural disaster like this is always out of coverage as it requires special tariff as the risk is enormous. So the possibility of liability claims assuming monster proportion to affect major financial markets is less..
Please read the articles at Businessstandard - Estimating-insured-losses-in-japan-is-difficult
Please click on the charts to see full picture.
6 comments:
excellent write up..
plz keep adding when time permits
sri..forgot 2 say hi..
:)
can u elabrote this""""Depreciating rupee at this juncture may hamper inflation control efforts. Time for revaluation. """"
and vis-a-vis crude coming down..
manu,
depreciating rupee may be favorable for exports but it increases import cost in layman terms. Regarding crude coming down is just market phenomenon, in real terms deficit in mark to market pricing of petro products is still huge. The decision to increase price has been postponed due to political uncertainty. Further now government is thinking in terms of going back to regulated price environment as regular increase of petro products is keeping the pressure on prices which shows up in inflation. Further this deficit has to be funded through budgetary allocation which increases fiscal deficit figure. It is high time, the government reforms indirect tax structure and think in terms of generating revenue from other sources to offset subsidy in petro products.
In the light of above and other deteriorating conditions, it is said that time for revaluation.
thnx pa ji..
more tax:)
u think RBI will move on 19th ..
17th sorry
your prediction is correct , when everybody is thinking market is bearish, u were still giving buying interest.
great work
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