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A swift bond rally triggered by a fall in interest rates and a fiscally-responsible Budget has come to the rescue of beleaguered Indian banks, which are in the throes of a deleveraging cycle.

India's 10-year bond yield have fallen over 150 basis points from their highest point this year.

Bond yields and prices are inversely correlated as a fall in yields makes older bonds yielding higher interest rates more attractive.

So investors holding bonds in a falling-yield environment see a notional gain. For banks, this means that bad loans become smaller as a proportion in an overall book that has been repriced higher.

The fall in bond yields, combined with a generous Rs 70,000-crore cash infusion by the government, would help exacerbate pressure on Indian banks, which are battling their worst NPA crisis in two decades.

Every basis point fall in bond yields benefit banks by an overall $50 million, given the size of their portfolio, an Economic Times article quoting an estimate by ICRA said.

The bond rally has been further bolstered by India's proposal last month to issue its first overseas bond.

Further, the Reserve Bank of India’s (RBI) rate-cutting panel will again meet on August 7 to decide policy rates.

India is among few countries with an investment-grade rating to offer yields of more than 5 percent, Manu George, director of fixed income at Schroder Investment Management Ltd. in Singapore, told Mint. “Indian bonds offer good value in a low-yielding world and have the potential to rally further."

In a recent interview, Romesh Sobti, chief executive officer at IndusInd Bank, pointed out that even in 2002, around the time the NPA cycle peaked out, it was a fall in bond yields that had come to the rescue of banks.

Hence, this is not the first time that a strong bond rally helped in dealing with the bad debt hovering over India’s financial system.

“While this time around the drop in the sovereign bond yields is not as dramatic, the quantum of bond holding is way higher,” Sobti said in the interview. “Gains will be handsome enough to enable banks to start cleaning up the books faster."

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Long-term perspective

The steep decline that came after the confirmation of the double resistance etched by the upper line of the descending channel and the 0.7055 with 0.7013 resistance area managed to bring the price under the 0.6858 major support level, pausing at the 0.6800 psychological level.

This movement, besides taking out the previous low that falsely pierced the 0.6858 level, is composed of strong bearish candles — the only one which does not have a long body, although is bearish, is the one on July 29, 2019, the reason being that the bulls were trying to halt the decline around an important psychological level, 0.6800, respectively.

From here, the price could consolidate above 0.6800 and then continue the downwards movement. Another possibility is the one of a throwback. In this case, the price might retrace towards 0.6858. This could end up with the actual confirmation of 0.6858 as a resistance, followed by a new leg down. Another possible scenario is a confirmation as a resistance of the projection of the 0.6831 low. Also to be considered is a false break of 0.6858 — the price might get above it but fail to confirm it as a support, with the consequent fall beneath it and the continuation of the decline.

So, as long as the price does not confirm 0.6858 as support, the movement towards south is natural, being the materialization of the impulsive wave that pertains to the descending trend. A first target is represented by 0.6700, with a possible extension on the first run to 0.6650.

Short-term perspective

The price is in a clear descending movement and, as long as it continues or as long as its change prints a continuation pattern, it is expected to continue.

The first sign of a pause could be offered if the price gets above the 0.6865 level — which corresponds to the 23.6 level of Fibonacci retracement. But even in this case the other projections — preferably up to 50.0, which corresponds to the 0.6935 level — are well suited short-term areas from where the price to continue declining. The first target is represented by the 0.6700 psychological level.

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 The dollar fell against safe havens such as the yen and Swiss francin early trading in Europe Friday, but was higher against most other currencies after President Donald Trump announced a sharp escalation of the U.S.’s trade war with China.

The yen had its best day against the dollar in two years on Thursday after the announcement of a new 10% tariff on $300 billion worth of imports from China. By 3 AM ET (0700 GMT), it was at 106.95 to the dollar, having risen to its highest since April 2018 against the greenback earlier.

The dollar was also lower against the franc at 0.9880, as traders unwound carry trades in a broad risk-off move across all markets.

Trump’s announcement shattered a fragile truce with China over trade that had been hastily put in place ahead of the G20 summit a month ago. It represents a sharp escalation of the conflict, by extending tariffs to effectively all U.S. imports from China. As such, the risk of them feeding through to higher prices for U.S. consumers is markedly higher.

Analysts from the Peterson Institute in Washington estimated that the move will raise the average tariff on Chinese products to 21.5%, from barely 3% in 2017 when Trump took power.

Trump’s move came only a day after Federal Reserve chairman Jerome Powell had pointed to the trade dispute as the biggest single risk facing the U.S. and global economies – observations that drew criticism from Trump show said that Powell had “let us down.”

“Ironically the Fed’s easing gives the President the breathing space to now play hard ball,” Megan Greene, a senior fellow at the Harvard Kennedy School, said via Twitter.

The dollar surged against high-yielders overnight, hitting a 10-year high against the Aussie and rising sharply against the Korean won and kiwi. It also surged 1% against the offshore Chinese yuan, although China’s central bank restrained the drop in the official rate.

The impact on the euro and British pound was less severe, although reports that Trump may make an announcement on trade with the EU later Friday added to the general sense of unease.

The dollar index, which tracks the greenback against a basket of currencies, hit its highest level since May 2017 at 98.697 overnight, before retracing to 98.105 in European trading.

The escalation of the trade war threatens to overshadow what would normally be the main event of the monthly economic calendar – the release of the U.S. labor market report for July. Nonfarm payroll growth is expected to have slowed to 160,000 from 224,000 in June.

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In order to maintain price stability, the Government has set the Bank’s Monetary Policy Committee (MPC) a target for the annual inflation rate of the Consumer Prices Index of 2%. Subject to that, the MPC is also required to support the Government’s economic policy, including its objectives for growth and employment. The Inflation Report is produced quarterly by Bank staff under the guidance of the members of the Monetary Policy Committee. It serves two purposes. First, its preparation provides a comprehensive and forward-looking framework for discussion among MPC members as an aid to our decision-making. Second, its publication allows us to share our thinking and explain the reasons for our decisions to those whom they affect. Although not every member will agree with every assumption on which our projections are based, the fan charts represent the MPC’s best collective judgement about the most likely paths for inflation, output and unemployment, as well as the uncertainties surrounding those central projections. This Report has been prepared and published by the Bank of England in accordance with section 18 of the Bank of England Act 1998. The Monetary Policy Committee: Mark Carney, Governor Ben Broadbent, Deputy Governor responsible for monetary policy Jon Cunliffe, Deputy Governor responsible for financial stability Dave Ramsden, Deputy Governor responsible for markets and banking Andrew Haldane Jonathan Haskel Michael Saunders Silvana Tenreyro Gertjan Vlieghe

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Unemployment in the U.S. is at a half-century low and the S&P 500 is trading at near-record highs. Nevertheless, the Federal Reserve today trimmed interest rates for the first time since the financial crisis on stalled manufacturing growth and an anticipated world economic slowdown.

The easing cycle may be the catalyst gold needs to outperform the market and retrace its monster bull rally in the 2000s, according to Bloomberg Intelligence strategist Mike McGlone.

“Gold prices appear on a similar launchpad as 2001 when the Fed began an easing cycle,” McGlone writes in a note dated July 29. “The greatest bull market of this millennium so far began about the time of that first rate cut, following an extended gold-price downdraft and rally in the dollar.”

With the Fed having locked in a rate cut, the question now is: What happens in the months to come? Is this simply a one-off, or is it indeed the start of a new easing cycle?

Markets appear to have priced in three cuts by year-end. As a result, I would expect to see the dollar trade lower, which in turn should allow the price of gold—the classic anti-dollar—to soar.

As I shared with you earlier in the month, a weaker greenback is one of three “key ingredients” for a gold bull market, according to research firm Alpine Macro, the other two being a more accommodative Fed (check) and rising geopolitical risk

As Europe faces prospects that negative rates might become a long-term fixture in the euro region, concerns are mounting in the U.S. that a global slide toward negative yields could infect the market for Treasury securities, should the U.S. slip into a recession,” writes Guggenheim Investments Chief Investment Officer Scott Minerd. “These concerns are well founded.”

Minerd reminds readers that, during economic slowdowns in the past, the Fed reduced rates by an average of 5.5 percentage points. Today, as you well know, we don’t have those 5.5 percentage points—unless rates were allowed to fall below zero.

Yields turning negative here in the U.S., as they have in Europe, Japan and elsewhere, would mark the start of a “paradigm shift” that billionaire hedge fund manager Ray Dalio alluded to in a recent LinkedIn post.

According to Dalio, lower-for-longer rates and other unorthodox monetary policies “will produce more negative real and nominal returns that will lead investors to increasingly prefer alternative forms of money (e.g., gold) or other storeholds of wealth.”

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The US dollar is rallying against a basket of currencies to close out the trading week, driven by a better-than-expected but slower than usual second-quarter economic report. The gross domestic product cooled down in the April-to-June period, but there were some bright spots in the overall report, including a surge in consumer spending.

According to the Bureau of Economic Analysis (BEA), the gross domestic product advanced a 2.1% annual clip in the second quarter, down from 3.1% in the first three months of 2019. This was higher than the market forecast of 1.9%.

Despite the disappointment behind the report, a deep dive into the numbers do paint somewhat of a positive portrait of the US economy from a consumer standpoint. In the April-to-June period, consumer spending surged 4.3%, driven by greater automobile, food, and apparel purchases. But it was not good news for businesses because fixed investment slipped 0.8%, investment dropped 11%, spending on equipment edged up just 1%, and outlays fell 1.5%.

Researchers say that if inventories would have remained neutral instead of declining $44.3 billion, then the economy would have expanded at a 3% rate in the second quarter.

Elsewhere in the report, the trade deficit impacted GDP as imports decreased and exports soared 5.2%. Federal government spending spiked 5%. Inflation, using the Personal Consumption Expenditures (PCE) index, clocked in at a 1.4% pace year over year. 

Researchers say that if inventories would have remained neutral instead of declining $44.3 billion, then the economy would have expanded at a 3% rate in the second quarter.

Elsewhere in the report, the trade deficit impacted GDP as imports decreased and exports soared 5.2%. Federal government spending spiked 5%. Inflation, using the Personal Consumption Expenditures (PCE) index, clocked in at a 1.4% pace year over year.

Since Federal Reserve officials have made public their concern about a potential slowdown, the latest economic figures could push the Eccles Building to impose a 25-basis-point cut to interest rates from the current target range of 2.25% to 2.50%. More than half the market anticipates two rate cuts this year, according to the CME Group FedWatch tool.

Although this report does suggest that the US economy might expand more slowly in the second half of 2019, some financial institutions believe that this is just a slight bump in the road. Goldman Sachs is prognosticating that growth will return to normal in the second half.

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Coffee shipments from India, Asia's third-largest producer and exporter, remained flat at 2,38,669 tonnes so far this calendar year with maximum shipments made to Italy, as per the Coffee Board.

The country had shipped 2,37,780 tonnes of coffee bean during January-July in the previous year, its data showed.

India exports large volumes of Robusta variety of coffee bean, followed by Arabica and instant coffee.

According to the board, export of Robusta coffee rose to 1,35,892 tonnes till July 2019, from 1,26,254 tonnes in the year-ago period.

Arabica coffee shipments, however, declined to 37,609 tonnes from 40,795 tonnes in the said period.

Even shipment of instant coffee showed a decline as volumes dropped to 12,504 tonnes during January-July of this calendar year from 16,303 tonnes in the same period in 2018.

Re-export of coffee was also slightly down at 52,513 tonnes from 54,222 tonnes in the period under review.

Of the total exports, more than 55,000 tonnes of coffee is estimated to have been shipped to Italy, followed by over 25,000 tonnes to Germany and about 16,000 tonnes to Russian Federation.

The country's coffee output is pegged at 3,19,500 tonnes for the 2018-19 marketing year (October-November), as against 3,16,000 tonnes in the previous marketing year.

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The Indian readymade garment (RMG) makers are likely to witness revenue growth of 10 per cent in this calendar year, mainly driven by healthy domestic demand and 10 per cent growth in exports, the report said.

Crisil Ratings expect revenue growth of RMG makers to accelerate 300 basis points (bps) to 10 per cent in calendar 2019 (CY), compared with 7 per cent in CY2018, riding on robust domestic demand and a spurt in exports.

Higher revenue growth will provide the benefit of operating leverage and will help improve profitability, it said adding that profitability of exporters is also aided by favourable exchange rate and restoration of incentives, resulting in better cash generation, which will improve the credit profiles of RMG firms this fiscal.

Credit profiles had moderated in the previous two fiscals owing to depreciation in the rupee against the dollar and a reduction in export incentives, it said.

Domestic sales logged an annual growth rate of 9.6 per cent in the five years through CY2018 to Rs 4.83 lakh crore, which was 80 per cent of the sector's revenue.

That pace is set to increase to 10-10.5 percent this year for two reasons, increasing penetration of both organised retail and brands in tier II and III cities, and rising growth of value apparel retail segment.

Complementing healthy domestic growth will be a rebound in exports growth to 7-8 per cent this year after two years of de-growth. In the first 6 months of this year, RMG exports are already up over 10 per cent compared to last year.

Exports growth will benefit from a likely depreciation in the rupee against the dollar, a partial restoration of export incentives recently and a pick-up in growth in the United Arab Emirates, the third-largest exports destination after the US and the European Union, the report said.

"Operating profitability of domestic-focussed RMG firms is expected to remain stable at 10-11 per cent, whereas that of exporters should improve another 50-100 bps this fiscal, on top of the 100-120 bps increase seen last fiscal. Exporters will benefit from the higher export incentives," Crisil Ratings senior director Anuj Sethi said.

Going forward, currency volatility and the government policy on export incentives will be key things to watch out, he added.

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The Indian readymade garment (RMG) makers are likely to witness revenue growth of 10 per cent in this calendar year, mainly driven by healthy domestic demand and 10 per cent growth in exports, the report said.

Crisil Ratings expect revenue growth of RMG makers to accelerate 300 basis points (bps) to 10 per cent in calendar 2019 (CY), compared with 7 per cent in CY2018, riding on robust domestic demand and a spurt in exports.

Higher revenue growth will provide the benefit of operating leverage and will help improve profitability, it said adding that profitability of exporters is also aided by favourable exchange rate and restoration of incentives, resulting in better cash generation, which will improve the credit profiles of RMG firms this fiscal.

Credit profiles had moderated in the previous two fiscals owing to depreciation in the rupee against the dollar and a reduction in export incentives, it said.

Domestic sales logged an annual growth rate of 9.6 per cent in the five years through CY2018 to Rs 4.83 lakh crore, which was 80 per cent of the sector's revenue.

That pace is set to increase to 10-10.5 percent this year for two reasons, increasing penetration of both organised retail and brands in tier II and III cities, and rising growth of value apparel retail segment.

Complementing healthy domestic growth will be a rebound in exports growth to 7-8 per cent this year after two years of de-growth. In the first 6 months of this year, RMG exports are already up over 10 per cent compared to last year.

Exports growth will benefit from a likely depreciation in the rupee against the dollar, a partial restoration of export incentives recently and a pick-up in growth in the United Arab Emirates, the third-largest exports destination after the US and the European Union, the report said.

"Operating profitability of domestic-focussed RMG firms is expected to remain stable at 10-11 per cent, whereas that of exporters should improve another 50-100 bps this fiscal, on top of the 100-120 bps increase seen last fiscal. Exporters will benefit from the higher export incentives," Crisil Ratings senior director Anuj Sethi said.

Going forward, currency volatility and the government policy on export incentives will be key things to watch out, he added.