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Fearful Fed, rising crude and more... - Views on News from Equitymaster
 
 
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  • Jun 17, 2008

    Fearful Fed, rising crude and more...

    Interest rates on the rise
    The Fed Reserve is in a quandary. Fearful of a recession in the US, which was fuelled by one of the worst financial crisis in the world namely the subprime meltdown, the Fed Reserve went on an interest rate cutting spree in the hope that consumers would have more income to spend; incomes being eroded due to falling house prices and rising unemployment. However, since then, rising commodity prices and high inflation rates have posed a serious dilemma to the US Fed, which will most likely halt the interest rate cuts, if not effect an increase. And US is not the only country at the receiving end; inflation is hurting other countries too both in the developed as well the developing world.

    While the European Central Bank (ECB) has hinted at the possibility of a rate hike, the developing world primarily China and India have also followed suit. While China has raised the amount of reserves banks must hold against their loans, the Central Bank of India, Reserve Bank of India.(RBI), too has been compelled to raise the repo rate to 8%. Brazil, Russia, Indonesia and the Philippines have also increased rates. This has cast a pall of gloom over the investing community, who fear diminishing corporate earnings and slowdown in growth, a sentiment, which has been reflected in the weakness prevailing across major stockmarket indices around the world.

  • The poorer Rupee

    Daiichi-Ranbaxy deal to set an example?
    Japanese drug maker Daiichi Sankyo acquiring majority stake in Indian pharma company Ranbaxy has been touted as one of the biggest deals in the global pharma space. Besides the fact that both are big and established companies in their respective countries; Daiichi is the third largest pharma company in Japan, while Ranbaxy is India's largest pharma company, the price that Daiichi has paid - a mammoth US$ 4.6 bn - underlines how large this deal is. Infact, this deal is likely to set the trend for other global innovator pharma companies to follow suit.

    A declining pipeline of drugs, fewer new drug approvals and impending patent expirations continue to mar the financial performance of innovator companies. Their problems are compounded further by the fact that generic companies are becoming more and more aggressive in challenging patents, which has caused legal costs to spiral. Many of them have also entered into settlement agreements with generic companies, and by making payments have ensured that the latter launch the drug only close to the date on which the patent is set to expire. In such a challenging scenario, innovator companies acquiring generic companies cannot be ruled out. This is despite innovators being reluctant to associate themselves with generic companies owing to thin profit margins of the latter. At present, Novartis is the only company, which has been able to have the best of both worlds; while the company is among the top 5 pharma companies in the world, its generic arm Sandoz is the second largest generics company in the world.

  • Ranbaxy sells out to Daiichi: Our view

    Is there an end to rising oil prices?
    Not too soon, says Morgan Stanley through its Global Economic Forum. Until recently, the spike in oil prices was demand driven as emerging economies' (primarily India and China) thirst for oil was unquenchable. Morgan Stanley states "the two most recent spikes in crude oil prices, from US$ 100 per barrel to US$ 125 in early May, then from US$ 128 to close to US$ 140 in early June, are pointing to structural changes in the oil market, which is suggesting that we are now facing a genuine supply-side shock. The nuance is important because a supply-side shock is by nature contractionary for the global economy, in contrast with a demand-driven change, where strong economic expansion is inflating input prices".

    It further states that non-OPEC producing countries having likely reached peak production and geopolitical issues in the Middle East are two major reasons supporting the premise of a supply-induced shock. Particularly, the recent tensions between Iran and Israel have brought to the fore the possibility that there is not enough global spare capacity to extract oil, with OPEC nations seemingly reluctant to increase output and non-OPEC production having stagnated. No wonder than, that Saudi Arabia's decision to raise production by 500,000 barrels per day was greeted with much cheer sending the global stockmarket indices on an upward path.

  • High crude prices: Will they last?

     

     

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