1    The Chinese (GDP) and Brazilian (2% tax) Effect on Financial Markets across the globe


    Volatility in equity mark...
2    The Chinese (GDP) and Brazilian (2% tax) Effect on Financial Markets across the globe


    fund inflows seen in Braz...
3    The Chinese (GDP) and Brazilian (2% tax) Effect on Financial Markets across the globe


    Indian Economy to not onl...
4    The Chinese (GDP) and Brazilian (2% tax) Effect on Financial Markets across the globe


    effects? The after effect...
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Chinese GDP And Brazilian Tax Effect On Financial Markets Across The Globe

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Volatility in equity markets to take centre-stage in coming weeks (coming weeks because CHINA GDP and earning season could provide little more upside to market at-least till the end of earning season) on wake of debate around reversing policy actions, actions by regulators around the globe (especially emerging market) to prevent their respective currencies appreciate drastically against weakening Dollar (Brazil being the classic case), continued lower treasuries yields (with FED not expected to reverse its policy any time soon), Money finding its way to safe heavens, continuing commodities surge (base metals).

The Brazilian 2% tax debate on foreign funds purchases of Fixed-income securities and equities: The debate around Brazilian Finance Ministry move late Monday to imposed a 2% tax on foreign purchases of fixed-income securities and equities, effective Tuesday: The after effects: Brazil's Bovespa index fell 2.9% to 65,303.11, its worst percentage decline since late June, but managed to fight its way back from an intraday fall of nearly 5%. Brazilian Real tumbled 2.2% hit on Tuesday on the back of same news.

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Chinese GDP And Brazilian Tax Effect On Financial Markets Across The Globe

  1. 1. 1 The Chinese (GDP) and Brazilian (2% tax) Effect on Financial Markets across the globe Volatility in equity markets to take centre-stage in coming weeks (coming weeks because CHINA GDP and earning season could provide little more upside to market at-least till the end of earning season) on wake of debate around reversing policy actions, actions by regulators around the globe (especially emerging market) to prevent their respective currencies appreciate drastically against weakening Dollar (Brazil being the classic case), continued lower treasuries yields (with FED not expected to reverse its policy any time soon), Money finding its way to safe heavens, continuing commodities surge (base metals). The Brazilian Effect The Brazilian 2% tax debate on foreign funds purchases of Fixed- income securities and equities: The debate around Brazilian Finance Ministry move late Monday to imposed a 2% tax on foreign purchases of fixed- income securities and equities, effective Tuesday: The after effects: Brazil's Bovespa index fell 2.9% to 65,303.11, its worst percentage decline since late June, but managed to fight its way back from an intraday fall of nearly 5%. Brazilian Real tumbled 2.2% hit on Tuesday on the back of same news. Temporality (believe only for a day or two), there have been some profit- taking across all emerging markets after Brazil announced a tax on foreign capital inflows.” The Brazilian currency had been up about 38% against the dollar since the start of this year and the Bovespa was up nearly 80% before new tax was announced. 21st October, 2009 In my understanding, these events are extremely short-lived and are reactive in nature. Investors give a spontaneous reaction to these news and things turn to normalcy after a couple of days or weeks. The return to normalcy though this time around could be tough because of strong appreciation in Brazilian Real against Dollar one of the main reason attributed to this was the huge foreign Vinit Tulsyan http://vinittulsyan.wordpress.com
  2. 2. 2 The Chinese (GDP) and Brazilian (2% tax) Effect on Financial Markets across the globe fund inflows seen in Brazilian equity & fixed income markets. If investors forget this one off event, and Brazilian currency and equity market continues to be buoyant, some other bomb shell could be dropped by the regulator. How much drop in the foreign fund inflows in Brazil happens due to this move, how much the currency depreciates against dollar, needs to be seen in coming weeks. I personally doubt whether this particular move will be able to put a curb to appreciating Real or to equity markets, which on the back of strength in Brazilian economy, higher commodity prices, a credit rating upgrade from Moody’s (to investment grade on Sep. 22, after Latin America’s largest economy built record foreign reserves and averted a prolonged recession amid the global financial crisis) and forecasts for faster economic growth, all time low interest rates in developed world, money available at cheap rates, money trying to find its way to economies where the risk & return profile is still favorable etc. The new tax will make it more expensive for Brazilian companies to raise financing because investors will demand a steeper yield to compensate for the additional cost. Another thing to consider is that if Investors are having double digit returns by either investing in Equities of through exposure to currencies, will a 2% move deter investor to park their money in Brazilian economy. One thing is for sure that all these on the back of prevailing uncertainty will just make investors life terrible and make markets extremely volatile. Generalization of Brazilian effect to Indian Currency: To continue its buoyancy against USD in near to medium term 21st October, 2009 I expect Indian Rupee to continue its appreciative journey against USD in near to medium term. The confidence stems from the same reasoning applying to Brazilian economy. On the back of strength in Indian economy, consumption returning to normalcy, higher commodity prices, an expected credit rating upgrade from rating agencies (on the back of govt. stability, an expected 6.5% growth, record IIP numbers etc), record foreign reserves, resilience of Vinit Tulsyan http://vinittulsyan.wordpress.com
  3. 3. 3 The Chinese (GDP) and Brazilian (2% tax) Effect on Financial Markets across the globe Indian Economy to not only avert this economic crisis but to emerge stronger, forecasts for faster economic growth (in coming years), all time low interest rates in developed world, money available at cheap rates, money trying to find its way to economies where the risk & return profile is still favorable etc. I personally do not think that Indian regulators will make such a move of imposing a tax on foreign purchases of either equities or fixed-income securities. RBI might intervene in the market and support USD but the reasons given above would ultimately let the market dynamics determine the exchange rate. Further, I am of conviction that RBI would reverse its monetary policy much before most of the advanced economies especially US, in that scenario as well; the Indian currency will further be strengthened. The one and only reason as of now which could put a PAUSE (a pause not a stop) on currencies appreciation would be the expected sideways and volatile movement in equity markets, which could propel fund flows to get narrower than in the last few months. The Chinese GDP effect: Chinese economy has become such an important indicator for global growth to resume. Today, all the emerging markets paused ahead of Chinese GDP and in my expectation that when China reports its third quarter GDP tomorrow, it will become the most important reason for the financial markets to react. All major investment avenues within all emerging markets will take a cue from it, be it currencies, commodities, equities, OIL etc. The emerging 21st October, 2009 market currencies will take a cue from it and on the back of strength from Chinese markets; all other currencies will derive strength on the back of strength in GDP numbers. The bond yields should rise with the expectation that if the GDP number is good, it might result in policy action to be reversed sooner than later. The commodities will surge (if the number is good) due to positive sentiment from Chinese US$ 580 billion stimulus, which has started showing its Vinit Tulsyan http://vinittulsyan.wordpress.com
  4. 4. 4 The Chinese (GDP) and Brazilian (2% tax) Effect on Financial Markets across the globe effects? The after effects are visible enough with Sesa Goa., India’s biggest iron- ore exporter expected to more than triple production because of a rebound in prices and demand from China and diversify into making steel. BHP Billiton’s (World’s largest mining company) iron ore production rose to a record, driven by a rebound in global steel demand. Steel companies are resuming output at mills in China, the largest consumer of iron ore, Europe and the U.S. to supply auto and appliance makers on signs of a global recovery in industrial demand. BHP in its quarterly production report said that “Chinese economic growth continues to be robust on the back of strong domestic-focused consumption and infrastructure- based stimulus spending”. One caveat is that if China’s economic growth for the third quarter fall short of market estimates, everything could reverse temporally (temproraliy because investor psychology would then focus on optimism going forward). Expectations for emerging market currencies (including YUAN appreciation) appreciation may take a halt; the positive bias in equities could easily turn to flat to negative. The commodities (including oil) rally could halt as well. Though I believe, all these would lead to higher USD on the back of expected weakness in emerging market for the time being (if Chinese GDP figures turn ugly). The expectation (as surveyed by Bloomberg) is that GDP should rise 9 percent from a year earlier in the third quarter, the biggest increase since the same period of 2008. *** Thanking You, Warm Personal Regards, 21st October, 2009 Vinit Tulsyan http://vinittulsyan.wordpress.com *** Vinit Tulsyan http://vinittulsyan.wordpress.com

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