Mutual Funds vs Model Portfolios 14

Central Banks united in their opinion to end the ‘easy money’ era

Tapering to commence due to rising inflationary pressures and rise in unemployment levels The Federal Reserve introduced bond buying programme at the beginning of the pandemic to ensure liquidity. These bond purchases added more than $4 trillion to the Federal Reserve’s balance sheet. However, due to enduring inflationary pressures, the Federal Reserve has decided to taper its bond buying programme systematically and slowly pull back the stimulus provided, by next June. Other central banks such as European Central Bank, Bank of England, Reserve Bank of Australia etc. have all released mixed guidance on the pace of bond purchases. Impact of these policy changes on the prices of various asset classes remains to be seen.

After booming across spectrum, commodity prices may stabilise this year

Crude oil hit multi-year highs due to improved global demand outlook amid supply tightness The price of Brent has gained over 60% this year and hit a three-year high of $86.70 in October, supported by recovering demand and supply restraint by OPEC+. Oil prices have increased alongside a broader rally in commodities including natural gas and coal amid an energy crunch that is sweeping Europe and Asia. Supply pressures are expected to continue with OPEC+ to add only 400,000 barrels per day of crude oil to global supply.

Gold witnessed a steady drop in prices due to improved risk appetite and dollar rally Gold demand (excluding OTC) fell 7% year-on-year to 831t in July to September quarter of 2021. This drop was almost exclusively driven by ETFs – which swung from very large inflows in Q3: 2020 to modest outflows this year – overshadowing strength in other sectors of demand during the quarter. Gold price averaged $1,790 an ounce throughout the third quarter compared to $1,900, a 6% drop year-on-year.

How is the “transitionary” inflation affecting global currencies?

US Dollar Index After facing wild fluctuations in 2021, US dollar index has breached the 94.5 mark, levels not seen since July 2020. The latest uptick can be attributed to the fresh CPI figures which showed a more than expected rate of inflation of 6.2%, marking the highest reading since 1990 and raising expectations of earlier monetary tightening by the Federal Reserve.

How is the Indian Rupee stacked up against other indices The Indian rupee traded around 74.4 against the US dollar, falling 0.7% from its 5-week high of 73.9 hit early in the week as the US dollar remains strong and amid weak inflows in Paytm, one of its largest IPOs. Heaving selling pressure from foreign institutional investors and a slight increase in global crude oil prices also pressured the rupee. Will another Taper Tantrum hit the Fixed Income Markets?

Rising Bond Yields in developed economies Markets have started to sense that the inflation may not be transitionary and may have some persistence in it. The US 10Y Bond yields have started to climb up due to the selling pressure created by inflation and taper talks by the Federal Reserve.

Indian Bond Markets The yield on the 10-year government bonds in India stood at 6.3% in November, slightly below levels not seen since February of 2020, and tracking the US treasury yield, amid persistent inflationary pressure from surging crude oil prices and supply constraints. Meanwhile, the RBI has announced opening of the US $1.1 trillion sovereign bond market to retail investors through Prime Minister’s “RBI Retail Direct Scheme”