Market swings get more aggressive

Volatility in Singapore equities has surged since China's yuan devaluation in mid-August, bringing cheer to stockbrokers and bargain-hunters

By

Melissa Tanmelissat@sph.com.sg@MelissaTanBT

Wild swings have made cameo appearances from time to time in the local stock market but these days they seem to be gunning for a regular starring role. 

PHOTO: BLOOMBERG

 Wilder swings

 Covering more ground

SEP 14, 20155:50 AM

Singapore

WILD swings have made cameo appearances from time to time in the local stock market but these days they seem to be gunning for a regular starring role.

By several measures, volatility in Singapore equities has surged ever since China's yuan devaluation in mid-August, bringing with it extra business for stockbrokers and a spot of good hunting for those on the lookout for a bargain.

Analysts say the local bourse is likely taking its cues from markets such as China and the US, where the VIX fear gauge (a popular measure of market volatility) has spiked to historic highs over the past few weeks. However, opinion is split on how the dust will eventually settle.

Some analysts think the market will soon return to a steady state, while others believe it may have entered a new phase of relatively elevated volatility compared to the placidness of 2014, given external factors such as a looming interest rate hike in the world's largest economy and a slowdown in the second-biggest one.

Up until a month ago, the norm for the benchmark Straits Times Index (STI) was to post mild daily moves of less than one per cent in either direction. That has changed in recent weeks, with the index beginning to cover more ground each session.

Out of the 172 trading sessions for the Singapore Exchange (SGX) so far this year, starting Jan 2, there were only 28 sessions - or about one in six - where the STI's daily percentage change was at least one per cent, going by data compiled by The Business Times. Tellingly, the brief period between Aug 11 and Sept 10 disproportionately accounted for half of these 28 unusual sessions. Aug 11 was the day of China's first yuan devaluation.

Other numerical indicators paint a similar picture. A weekly sum of absolute STI percentage changes climbed to 9.2 percentage points for the week of Aug 24-28, the highest since the first week of October 2011. The daily average percentage change in the STI over Aug 24-28 came in at 1.84 per cent, also rather large by the index's usual standards.

Kelvin Tay, regional chief investment officer for Southern Asia Pacific at UBS Wealth Management, said there was a "discernible increase" in STI volatility since the yuan devaluation. "In the days following the depreciation, China also released a set of rather poor manufacturing data (Caixin PMI) which spooked the market. It was therefore not surprising that the STI saw heightened volatility since that period," he said.

"For example, the raw beta of the STI from the beginning of the year to just before the yuan devaluation was 0.18, but this jumped to 0.43 (in the period) from Aug 11 till now, based on Bloomberg data. Technically, raw beta is obtained from the linear regression of the STI's historical data to the S&P 500."

That increase in "raw beta" indicates the STI has become more correlated with the S&P 500, which has got its own shot of caffeine. The VIX, a volatility gauge based on S&P 500 options, roughly tripled to 40.74 on Aug 24, its highest since October 2011.

The heightened fluctuations in the local stock market have led to more trading activity, a boon for remisiers.

Raymond Chee, managing director of OCBC Securities, said its customers' average daily trading value for August was 46 per cent higher than July's. A large part of that jump came from Aug 11-13.

During those three days, the average daily trading value for SGX-listed stocks was 25 per cent above the average figure for the whole of August, he added. "While the market volatility has triggered selling from many investors, it has also presented an opportunity for investors with a longer-term horizon to enter the market to take advantage of cheaper valuations at this time."

Analysts say the market may eventually settle down after a few months, though volatility levels could remain higher than they were last year.

"The next few months are likely to remain rough for shares as September and October are often tough months and the worries about China and the Fed are likely to linger for a while," said AMP Capital economist Shane Oliver in a Sept 5 note.

Barclays said in a Sept 8 report that it expected an "eventual decline in volatility from extreme levels", which could bode well for equities, though it did not specify when.

Other market watchers pointed out that the local market's mutedness in recent years could have been an anomaly in the first place.

"It is not that the higher volatility is the new normal, it is simply the old normal. Volatility was abnormally low in 2014," said Bryan Goh, chief investment officer of wealth manager Bordier. "We have had long periods of low volatility punctuated by instances of financial crisis, notably in 1997 and 2008. Even if we discount these extraordinary periods we can see that volatility was at the low end of its historical range. In other words, markets were too complacent."

That means the recent spike in volatility could simply mark a gradual return to historical norms, he added. "Volatility has now recovered somewhat but it is still low relative to its historical range. I expect volatility to fall from the current levels but not to return to the levels seen in 2014."

      

Investors' fears over emerging economies growing

Yuan devaluation jolted markets, putting pressure on Asian currencies and raising asset volatilities, while continued oil price fall affected outlook for commodity producers

By

Andrea Sohsandrea@sph.com.sg@AndreaSohBT

Emerging market economies are now facing a double whammy with the economic slowdown in China and the stronger US$: growth prospects have weakened while the burden of US$-denominated debt has risen.

PHOTO: REUTERS

SEP 14, 20155:50 AM

Singapore

INVESTORS are becoming increasingly concerned about growing vulnerabilities in emerging market economies, especially China, as they reassess the global growth outlook, said the Bank for International Settlements (BIS).

"The Chinese authorities' decision in August to allow the renminbi to depreciate against the dollar gave markets a renewed jolt. The move intensified investors' concerns about growth prospects for China, emerging market economies more broadly and, ultimately, the global economy," it said in a quarterly review released on Sunday.

As a result, many currencies, especially those in Asia, came under pressure and implied volatilities spiked up across asset classes.

Oil prices resumed their downward trend after a brief respite in the second quarter of this year, most likely due to perceptions of falling demand as a result of weakening economic activity, although strong supply also played a part.

These, in turn, dented the growth outlook for commodity producers, leading to a renewed depreciation of their exchange rates, which was worsened by the strengthening of the dollar as a result of the US monetary policy outlook.

Before that, however, there were already shifts in international banking, securities and global liquidity earlier in the year, said BIS. "Global liquidity conditions were strong in the early months of 2015, particularly among advanced economies, but showed signs of weakening for emerging economies."

In the first half of this year, net debt securities issuance by borrowers in advanced economies rose to its fastest pace since before the financial crisis, but issuance by emerging economy borrowers slowed, it noted.

Emerging market economies are now facing a double whammy with China's economic slowdown and the appreciation of the US dollar: growth prospects, especially for commodity exporters, have weakened while the burden of dollar-denominated debt has risen in local currency terms.

In the meantime, diverging monetary policies continue to drive markets in the past few months, observed BIS. The Bank of Japan and the European Central Bank are continuing on their monetary stimulus programmes while the US Federal Reserve and the Bank of England move along the path towards an eventual increase in policy rates.

While the timing of the Federal Reserve's first move has become more uncertain as a result of the recent market turbulence, the interest rate differentials between the US and many other countries have remained wide, said BIS.

This has affected the behaviour of investors and borrowers. "With interest rates at or near record lows in the euro area, fixed income investors increasingly turned to higher-yielding dollar assets," said BIS.

In the first half of this year, flows into European exchange-traded funds linked to US bonds surged to US$4.8 billion, compared with US$4 billion for the whole of 2014 and US$3.4 billion in 2013.

Also, US firms are now increasingly issuing euro-denominated debt to benefit from the low borrowing costs. With the current European asset purchase programme weighing on the yields of government bonds in the core euro-area, yield-starved European investors have welcomed the rising supply of corporate debt, said BIS.

      

SINGAPORE GENERAL ELECTION

PAP ready to engage more deeply with citizens

Ruling party will not take support for granted, will continue to listen to the ground  

The PAP's Tampines GRC team (above) of Cheng Li Hui, Desmond Choo, Masagos Zulkifli, Heng Swee Keat and Baey Yam Keng and Marine Parade GRC team of Goh Chok Tong, Edwin Tong, Tan Chuan-Jin, Fatimah Lateef and Seah Kian Peng touring their constituencies yesterday, thanking residents for their support. 

PHOTOS: YEAP CT / LIANHE ZAOBAO AND ONG WEE JIN / THE STRAITS TIMES

SEP 14, 20155:50 AM

Singapore

FRESH from its strong victory at the general election on Friday, the People's Action Party has pledged to engage even more deeply with Singaporeans.

Given the 69.9 per cent mandate it received, it is all the more important that the PAP continues its efforts to listen to the voices of the people "even more extensively and even more deeply", said Education Minister Heng Swee Keat yesterday.

Mr Heng, leader of PAP's Tampines GRC team, was speaking to reporters before going around the constituency with his GRC team-mates, thanking residents and merchants. He had also led the Our Singapore Conversation (OSC) exercise in 2013 that engaged Singaporeans widely in dialogue sessions on the country's future directions.

Social and Family Development Minister Tan Chuan-Jin yesterday also said the ruling party would not be lulled into complacency by its superb showing at the polls - an almost-10 percentage point upswing in the popular vote from the 2011 election.

"We certainly don't take this strong support for granted... that would be disastrous," he said on the sidelines of a Marine Parade GRC victory parade.

While the election has brought out differences among voters, he called on Singaporeans to unite and find common ground to take the country forward.

"We need to figure out how to rally around, figure out how to converse as best as we can; I'm sure differences won't go away," he said.

"Some things we will be able to find common ground, some things we will just have to agree to disagree."

And "there are obviously calls for areas to improve", Mr Tan noted, citing the need to engage the public for inputs. "We need to learn to embrace that. It will be messier, it will take a bit longer. But on many fronts, we really should begin to engage our people and get their views on board."

During the GE campaigning, Defence Minister Ng Eng Hen had also talked about how the government will have to be more collaborative going forward, and its policies be more flexible and accommodating.

And at a rally last week, Dr Ng, who is also the PAP organising secretary, said he would, after the election, continue engaging Singaporeans from all walks and take in ideas broadly "from everywhere", including from the opposition.

Speaking to reporters yesterday, Mr Heng said that while public engagement has always been part of how the PAP has worked through the years, the OSC exercise had "significantly intensified the process".

For one, many government ministries set up units to consult the public after the OSC exercise, he noted, adding that in turn, many major policies were borne out of "very intense" consultation with the public.

"This style of getting ideas from our people, listening to the ground and formulating the best possible approach forward is very important and we will continue with this," he said, adding that he hopes such efforts will drive more active citizenry among Singaporeans.

Mr Heng's Tampines GRC team won 72.06 per cent of the votes against the National Solidarity Party, an upward swing of 14.8 percentage points from the 2011 result.

This outpaced the overall 9.8-point swing in votes for the PAP nationwide to 69.9 per cent, from the low of 60.1 per cent in 2011.

Mr Heng attributed the marked improvement in the PAP's performance to a sense of pride over how far Singapore has come over the last 50 years, amid a time of growing uncertainty and anxiety in the region.

The death of founding father Lee Kuan Yew in March, too, served as a reminder of the challenges Singapore had to overcome to get to where it is today.

"Having come so far in 50 years, there is a sense of excitement that we are poised to take Singapore forward in the next 50 years," Mr Heng said.

"What we must do is to make sure we harness the ideas and the creativity of our people, so that we can work together for a better future."

Meanwhile, Singapore Democratic Party chief Chee Soon Juan has raised the possibility of his party working "closer together" with the Workers' Party at the next general election.

In a Facebook post on Sunday, Dr Chee said many of his supporters have suggested that the SDP and WP "should work closer together to present a more coordinated opposition strategy and message".

Given the outcome of the polls, "I think so too", he wrote, adding that he will discuss the idea with his SDP central executive committee colleagues this week.

Dr Chee - whose party polled an average of only 31.23 per cent of the vote across the 11 seats it contested - had, during election campaigning, dismissed the WP as "ineffective opposition".

At a lunchtime rally in Raffles Place last week, he said that the PAP is "doing as it pleases" as there is no effective opposition like the SDP in Parliament to check on the ruling party.

"(Without effective opposition in Parliament) to check on the PAP, the PAP does as it pleases, making dangerous, wrong decisions without proper scrutiny and accountability," he said.

Dr Chee himself contested the four-member Holland-Bukit Timah GRC, where the SDP obtained just 33.4 per cent of the votes - down from the 39.9 per cent it obtained in 2011 - in a battle many had expected to be a close fight.

     

Why Fed rate hikes could well be a boon for Asia: Editorial

The collapse of Lehman Brothers and subsequent contagion sent export-dependent countries in search of a more reliable customer. 

PHOTO: AFP

SEP 14, 20158:05 AM

[NEW YORK] In 2008, Asian economies had good reason to race to decouple from the struggling West. The collapse of Lehman Brothers and subsequent contagion sent export-dependent countries in search of a more reliable customer. Not surprisingly, they latched onto China.

That switch now looks like a bad bet.

China's economy is sputtering, its stocks are nose-diving and officials in Beijing appear ill-equipped to maintain the world's second-biggest economy as a stable, dependable trading partner. There's an obvious contradiction in developing nations relying so overwhelmingly on another emerging economy, and a highly unbalanced one at that. No doubt many in the region are now wishing they could decouple from China, too. 

Asia may be able to do just that soon, argues Bloomberg Industries economist Tamara Henderson, thanks to the approach of the Federal Reserve's first tightening cycle in a decade.

"Just as Asia decoupled from the US in the wake of the global financial crisis, benefiting from China's extraordinary stimulus at the time, Fed hikes may allow Asia to decouple from China," she writes in a recent report.

THE FED'S COUNTDOWN

However contrarian, the idea that the dreaded taper may be good for Asia has merit. It's hard to remember a moment since 2008 when markets were more panicked and central bankers so on edge. The conventional wisdom is that a Fed rate hike will send shockwaves around the world, sucking money back to the US and driving fragile nations to the International Monetary Fund for help. Such fears, however, lack perspective.

For all the risks, Asia's fundamentals are comparatively sound. Financial systems are stronger, transparency greater and currency reserve hoards big enough to avoid another 1997-like meltdown.

At the same time, higher US rates are an indication that the world's biggest economy - and customer - is humming again. "The start of a rate hike cycle sends an important signal: it is time to be confident about the world's largest economy," Mr Henderson argues. "The Fed appreciates this and global investors will eventually, too."

Ultralow rates, after all, reflect a psychological downgrade in investor perceptions. Aside from lifting the uncertainty irking markets, the normalization of US rates should in theory increase risk appetites. That should send capital back into Asia, supporting investments in infrastructure, productivity-enhancing technologies and education.

The resulting drop in bond yields, buoyant equities and more stable government balance sheets would provide governments with the cushion they need to retool economies.

The last 18 years have taught Asia two harsh lessons. One is the danger of relying too much on exports. The second is the risk of depending on a single customer. The first still hasn't been sufficiently internalised.

While Asia has made progress creating bigger service sectors, shipping goods overseas remains its main business. The second also needs reinforcing, as many economies in the region merely replaced the US with China.

Some of this complacency can be blamed on the excessive monetary stimulus of the last seven years. All countries had to do was guzzle capital from the US, Europe and Japan and tap into burgeoning Chinese demand. That cycle is over now as China slows and Washington and Frankfurt plot monetary exit strategies.

That's putting pressure on governments to create jobs in non-export industries to move upmarket - a process that should continue even if US demand picks up. The more progress Asia makes diversifying growth, the less vulnerable it will be to China's troubles.

Risks abound, of course, as the Fed's Sept 16-17 policy meeting approaches. The US central bank might go too far, as it did in the mid-and-late 1990s. But as Asia's 2004-2006 experience attests, markets can thrive even during a tightening cycle, as long as rate hikes are priced in and gradual.

In fact, stocks in India and Indonesia rallied amid Fed rate increases in the mid-2000s, while currencies in South Korea and Singapore gained markedly.

It's anyone's guess whether a similar pattern will play out this time. But far from devastating Asia, a Fed rate move could raise spirits just as China's slowdown is dragging them down.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

BLOOMBERG

      

Abbott tangles with regulators over Indian cough syrup complaint

Drugmaker Abbott Healthcare is challenging an Indian state's accusation that a sample of the company's cough syrup contained excessive levels of codeine. 

PHOTO: REUTERS

SEP 14, 20157:25 AM

[NEW DELHI] Drugmaker Abbott Healthcare is challenging an Indian state's accusation that a sample of the company's cough syrup contained excessive levels of codeine, the second multinational to question India's regulatory testing regime in recent months.

Whether the sample of Abbott's popular "Phensedyl" was a genuine product or a fake has not been established, but the suspect batch of 80,000 bottles has not been recalled.

The state laboratory in West Bengal first raised the alarm last November.

The previously unreported case underlines the weakness of India's unwieldy and poorly resourced drug and food regulatory system, the uncertainty it creates for foreign and domestic companies operating there and the potential risk to consumers.

Abbott Healthcare is a unit of US-based Abbott Laboratories. Abbott Laboratories also has a listed subsidiary in India, Abbott India Ltd.

Three months ago, Nestle was forced to withdraw its Maggi instant noodles from Indian shelves because the food safety authority banned the snack after its tests showed excess lead.

A court later overturned the ban in a partial victory for the Swiss food giant, but the allegations hurt the company's reputation and that of the country's regulators, who operate with few staff and poorly equipped facilities.

In the latest dispute, the laboratory found that a sample of Phensedyl contained more than twice the labelled amount of codeine, according to several state drug officials and correspondence between regulators and Abbott seen by Reuters.

Phensedyl sales are estimated to be more than 3 per cent of Abbott's US$1 billion India revenue. The sales are dwarfed by Abbott's global annual sales of over US$20 billion, but, as the Nestle case shows, fallout from safety scandals is unpredictable.

The excessive codeine, an opium derivative, would violate Indian drugs law. It triggered a "show cause" notice against Abbott, which was sent in March by the drug regulator in Himachal Pradesh state, where Phensedyl is manufactured.

In its response in late April, Abbott denied the allegations and urged regulators to not take any action. Abbott said it had found nothing unusual in its own and third party testing of a retained sample from the same batch of Phensedyl.

The company also asked regulators to give it more information about the source of the suspect sample and the manner in which it was collected, so that it could establish whether it was genuine and proper process was followed. "We are awaiting response from the authorities," the company said in answer to Reuters questions.

DRUG SEIZURE

The original test was carried out by West Bengal after Phensedyl bottles were seized near the border with Bangladesh, said Samit Saha, a state drug inspector involved in the case.

Codeine-based cough syrups are banned in Bangladesh, and smuggling is rife as people profit from higher prices there compared to India.

According to a copy of the inspector's report, the sample contained 21.37 mg of codeine per 5 ml dosage, instead of 10 mg specified on the label.

Saha said two other samples from different batches, however, showed normal codeine levels.

Excessive consumption of cough syrup with high levels of codeine can lead to health implications such as sedation, behavioural changes and drug dependence, said Amitabh Parti, a doctor at Fortis Memorial Research Institute.

In February, West Bengal listed the potentially tainted batch as "not of standard quality" in a monthly publication.

The bulletin, which is posted on the regulator's website, is supposed to alert consumers and pharmacies in the state to suspect drugs. But the West Bengal drug controller, C. M. Ghosh, said he does not have the resources to follow it up.

STATES OF CONFUSION

Navneet Marwaha, the drug controller in Himachal Pradesh, said in an interview that Phensedyl, which accounts for about a third of the Indian cough syrup market, is often copied by counterfeiters. He said Abbott's stocks of codeine were accounted for. "They (Abbott) are saying 'show us the sample so we can see whether it is genuine.' They have not been provided with the sample," Mr Marwaha said.

He added that it was up to West Bengal to provide the information to Abbott.

West Bengal's Ghosh said it was Himachal Pradesh's prerogative and the company can only challenge the test's findings at a federal drug lab with a court's permission.

Safety breaches and scares are common in India. According to a 2012 parliamentary report, nearly one in 22 locally produced drug samples is of sub-standard quality in India.

India has just 1,500 drug inspectors responsible for more than 10,000 factories, supplying medicines for a population of 1.2 billion and exporting to nearly 200 countries.

Mr Ghosh said he has 140 drug inspectors to monitor more than 50,000 pharmacies in the state.

The federal government wants to improve regulation of the key sector, and plans to spend US$263 million in the next three years to strengthen the national and state regulatory system with additional equipment and staff and new laboratories.

REUTERS

    
 

Asian futures mostly higher amid Fed focus while copper retreats   

SEP 14, 20157:37 AM

[WELLINGTON] Stock-index futures signaled a quiet start to the week in Asia as investors awaited this week's Federal Reserve meeting, with traders and economists split on whether interest rates will be raised. Copper retreated following mixed Chinese economic data.

Following their best week since May, copper futures were down 0.3 per cent in early Monday trading with a Bloomberg gauge tracking Chinese gross domestic product at 6.64 per cent for August, barely changed from July and stuck below the government's 7 per cent target. Oil rallied following last week's losses and New Zealand stocks advanced.

"It's an important week for markets, with a real possibility that US policy rates might rise for the first time since 2006," Raiko Shareef, a markets strategist in Wellington at Bank of New Zealand Ltd, said in an e-mail to clients.

"Investors are clearly skeptical, with the market pricing the odds of a liftoff at less than one-third. Analysts are effectively evenly split on the decision. We expect the FOMC to wait until December," he said, referring to the Fed Open Market Committee meeting on Sept 16-17.

The heightened volatility in financial markets since China unexpectedly devalued its currency has injected an element of uncertainty into the debate over whether the Fed will move to raise rates Sept 17, or wait until calm is restored. While some economists are advocating for a hike given improvement in the US labour market, traders are holding odds on a move at 28 per cent. China is also a factor, with data Sunday indicating weaker-than-expected factory output and the slowest pace of investment growth since 2000.

EARLY MOVERS

Standard & Poor's 500 Index futures added 0.1 per cent by 7.26am in Tokyo, after the index rose 0.5 per cent Friday, while New Zealand's S&P/NZX 50 Index, the first major gauge to start trading each day in the Asian region, climbed 0.1 per cent.

Futures on equity measures from Australia to Hong Kong gained in recent trading, while those on Japanese shares fell. Copper futures expiring in December on the Comex dropped to US$2.4470 a pound, after jumping 6.1 per cent last week, the most since May.

Futures on stock gauges across Asia rose with US equities late Friday. Contracts on Australia's S&P/ASX 200 Index added 0.5 per cent, while those on the Kospi index in Seoul were up 0.2 per cent. In Hong Kong, where shares pared weekly gains on Friday, futures on the Hang Seng Index climbed 0.4 per cent, and contracts on the Hang Seng China Enterprises Index, which tracks mainland stocks listed in the city, added 0.9 per cent.

Chinese index futures also indicated gains, with contracts on the FTSE China A50 Index up 0.9 per cent in most recent trading, and those on the CSI 300 Index gaining 0.2 per cent.

Ten-day volatility on the Shanghai Composite Index has retreated from the highest level in at least 10 years this month as regulators stepped up intervention in the market amid panic selling by investors. The stock gauge rose 1.3 per cent last week, its first five-day increase since mid-August, while the Enterprises index climbed 6 percent.

Futures on Japan's Nikkei 225 Stock Average were little changed at 18,090 for a second session in Chicago. Contracts in Osaka dropped 1 percent by 3 am on Saturday, to 17,990.

The yen, which typically moves at odds with Japanese equities, was steady at 120.54 per dollar following last week's 1.3 per cent drop, the steepest decline among major currencies.

Australia's dollar- regarded as a bellwether for Chinese sentiment given the two countries' close trading links - dropped 0.2 per cent at 70.79 US cents after climbing 2.7 per cent last week, its first weekly advance in more than a month. New Zealand's dollar was little changed at 63.18 US cents. The euro climbed 0.2 per cent to US$1.1356.

RETAIL SALES

A better-than-expected reading on Chinese retail sales helped mute the impact of the disappointing industrial output and fixed assets data, said BNZ's Shareef. Sales climbed 10.8 per cent in August from a year earlier, exceeding the 10.6 percent increase predicted by economists in a Bloomberg survey.

The yuan was little changed at 6.4105 per dollar in early Hong Kong trading, after jumping 0.9 per cent last week amid speculation China intervened in the market to prop up the offshore rate and align it more with the onshore one. The spread between the Hong Kong rate and the official one is now the smallest in nine months.

In the commodities market, West Texas Intermediate crude rose 0.6 per cent to US$44.91 a barrel. WTI sank 2.8 per cent on Friday, capping a weekly loss of 3.1 per cent amid ongoing concern over a glut in the commodity.

Goldman Sachs Group Inc helped stoke declines last session, with its analysts saying in a report that prices could slide to as low as US$20 a barrel as the global surplus is even bigger than they first estimated. Brent added 0.4 per cent on Monday to US$48.31, after sinking 3 per cent last week.

Gold for immediately delivery dropped 0.1 per cent to US$1,106.50 an ounce after capping a third straight week of losses. Futures on the precious metal slid to a one-month low on Friday as traders shied from making any significant moves before the Fed meeting.

The chance of a rate hike this week has suppressed gold, with higher borrowing costs dimming the metal's appeal given it doesn't offer returns like bonds or equities.

India reports on trade and wholesale prices, an inflation indicator, on Monday, while Australia will update on credit card purchases. Japan issues data on industrial production and Hong Kong reports on producer prices.

BLOOMBERG

   

Cooling inflation in India to fuel calls for lower interest rates

Raghuram Rajan, governor of the Reserve Bank of India (RBI), pauses during a news conference at the central bank's headquarters in Mumbai, India. 

PHOTO: BLOOMBERG

SEP 14, 20157:31 AM

[NEW DELHI] India's inflation probably cooled further in August, data on Monday is expected to show, adding pressure on its cautious central bank to cut interest rates again as soon as this month to spur economic growth.

With price pressures at record lows, expectations are building that the Reserve Bank of India will lower borrowing costs by at least 25 basis points (bps) at its next policy review on Sept 29, after three cuts earlier this year.

Calls for a rate cut have grown louder after annual economic growth slowed to 7 per cent in the April-June quarter from 7.5 per cent in the previous quarter. And some economists fear real growth is more sluggish than official figures suggest.

Arvind Panagariya, a top policy adviser to the government, said last week said the economy needed 50-100 bps of rate cuts. Similar calls were made by Indian business leaders at a meeting with Prime Minister Narendra Modi last Tuesday.

Annual consumer price inflation, which the central bank tracks to set rates, likely eased to 3.6 per cent in August due to lower fuel prices, from a record low of 3.78 per cent in July, according to analysts polled by Reuters.

Wholesale prices, another inflation gauge, are expected to have fallen for a 10th straight month, tumbling 4.40 per cent on-year compared with a 4.05 per cent fall in July.

Indeed, the rapid deceleration in prices has ignited a debate in New Delhi whether Asia's third-largest economy is heading towards deflation.

Arvind Subramanian, Modi's chief economic adviser, early this month warned of looming deflation and called for measures to boost consumer demand and step up investment.

RBI Governor Raghuram Rajan, however, is worried about a resurgence in price pressures in a country where inflation has been notoriously volatile.

While food inflation has remained in check despite below average summer monsoon rains, prices of some staples such as onions and lentils are racing up. Entrenched expectations of high inflation also are feeding into higher wages. "Yes, there has been moderation in some prices, but that's not signalling deflation," said N. Bhanumurthy, senior economist at the NIPFP policy think-tank in New Delhi. "In fact, we are not anywhere near that."

But for the RBI, as for many other central banks around the world facing sluggish growth, much will depend on whether the US Federal Reserve raises interest rates this week for the first time since 2006.

Easing policy at the same time as the Fed is tightening, however modestly, could spur further capital outflows from emerging markets.

While some analysts believe the chances of a September hike have eased amid fears of a China-led global slowdown, any fresh burst of financial market volatility following the Fed's decision on Sept 17 could force the RBI to stand pat.

"If there is a (US) hike, then market reaction will need to be monitored," said A. Prasanna, an economist with ICICI Securities Primary Dealership Ltd. "I still expect markets to calm down by the time of RBI policy date." The RBI has lowered rates by a total of 75 bps since January.

However, it left the policy repo rate on hold at 7.25 per cent at its last meeting, tying future cuts to the inflation outlook.

Wholesale price data will be released at 0630 GMT on Monday, with consumer prices at 1200 GMT.

REUTERS