Israel's response to the Iranian attack as the conflict between Iran and Israel continues on April 20, followed by Iran also saying it will respond appropriately to any Israeli action and that Iran is ready to "use weapons that have not been used so far", which increased investors' concerns about the continued escalation of the conflict between Israel and Iran and heightened fears that the conflict stemming from Gaza is spreading further into the Middle East, sending oil, gold and the dollar soaring.
And just as the escalation of the Iran-Israel conflict stimulates the rise in oil prices and will once again pry into the runaway inflation expectations in the United States, according to UBS strategists in a report published on the 16th, the strong growth in retail sales in the United States in March indicates that the combination of strong U.S. economic growth and stubborn inflation increases the likelihood that the Fed will raise interest rates rather than cut them, which will allow the Fed to raise interest rates again at the beginning of next year and reach 6.5% by the middle of next year The agency said that there is a growing possibility that U.S. inflation will fail to fall to the Fed's target level, prompting the Fed to raise interest rates again and triggering a deep sell-off in the U.S. bond and stock markets.
That sent the benchmark 10-year Treasury yield to a five-month high of 4.63%, up 12.9 basis points. The yield on the 30-year Treasury note rose 13.5 basis points at 4.739%, while the two-year Treasury yield, which feeds on the outlook for short-term interest rates, briefly touched 5%.
Interest rate swap pricing shows traders are betting less than 50% on the possibility of a Fed rate cut in July The interest rate market is at a hawkish tipping point, and market interest rate expectations may be higher than Fed expectations, and former U.S. Treasury Secretary Summers is more aggressive, he warned the market to prepare for the Fed not to cut interest rates this year, as high interest rates continue to shroud the U.S. banking crisis in the background, now only one step away from the 1970s-style stagflationary explosion, which makes the sell-off of U.S. Treasury bonds further expand, directly affecting the ability of the United States to bail out its own debt in a precarious situation.
At the same time, it also weakens the Fed's ability to help the U.S. Treasury Department finance and make it more difficult for the U.S. economy to "borrow new to repay the old, and eat what is needed", which indicates that the risk spillover from the Middle East situation and the constant background noise caused by the U.S. debt pressure are an inescapable black hole for the Fed.
This explains how difficult the Fed is currently struggling with controlling inflation and how much to retract its tight monetary policy to avoid the U.S. debt issuance woes and overburdens. It is clear that the snowballing of US debt is hampering US fiscal and monetary policy.
In fact, back in March, the US Treasury Secretary had a similar warning when she testified before Congress, saying that "at the current level of high interest rates, there is a possibility that the national debt will go bankrupt, and the debt of 34 trillion is a terrible number". This suggests that the US Treasury is on the brink of a precipice, and that it desperately needs global creditors to buy its huge flood of new debt to sustain its drunken addiction.
According to the analysis, the U.S. economy and financial markets are in these headwind environments, superimposed with high interest rates, high debt and low growth, investors may be ready to press the sell button at any time, including U.S. Treasury bonds and U.S. bank deposits and other iconic dollar-like assets, what should the U.S. Treasury and the Federal Reserve do at this time?
Therefore, the answer is obvious, the Federal Reserve and the U.S. Treasury will covertly accelerate the transfer of high inflation and debt default risks, and in addition to harvesting their own people, they will begin to continue to harvest some economies with obvious economic structure and financial debt problems.
As our research team has highlighted on various occasions, every cycle of a strong dollar in history has triggered economic and financial market shocks, and the earlier vivid examples of this effect can be seen in Venezuela and Zimbabwe.
The latest examples in recent weeks can also be cited in Israel, Indonesia, Hungary, Chile and Peru, while authorities in South Korea, Thailand and Poland have said in recent days that they are closely monitoring currency and financial market volatility and are ready to intervene at any time.
This shows that the risk of debt default in the United States is taking advantage of the different dollar cycles of tightening and easing, and combined with the monetary status of the US dollar to pass on to some countries with a single economic structure and relatively weak external reserves, in addition to the above 16 countries, these four countries are more likely to become victims of the US harvest, Lebanon, the Czech Republic, Bahrain and Egypt, these four countries may face the dilemma of dollar shortage or high dollar financing costs due to the steep inversion mode of external debt and external reserves. This is because the economies of these countries have fallen into a fragile pattern of severe currency depreciation and debt crisis, respectively.
This further confirms that as the U.S. dollar index fluctuates and rises, the spillover effects of the U.S. dollar index volatility will be indirectly passed on to the financial markets and commodity assets of these economies in an environment of supply chain shortages, economic growth and still high inflation, and every strong dollar cycle in history has always triggered crises.
So, the answer is obvious, the United States will covertly continue to pass on the growing debt default and deficit risks, and start to continue harvesting some economies with obvious economic structure and financial debt problems in order to collect seigniorage, and in the case of the tidal effect of the dollar, the economy, assets and exchange rates of these markets will continue to be affected, which makes the Indian economy shudder.
The analysis shows that the strong dollar and the recent surge in US bond yields pose potentially significant problems for India, representing a tightening of financial conditions in the Indian economy and making it more expensive to repay dollar-denominated debt.
It is clear that higher US dollar interest rates and external debt pressures are now hitting India's economic activity, while the global economic downturn, financial and credit crunch, and soaring oil prices caused by the Middle East crisis will also put pressure on inflation and demand in India, which is already at a precariously high level.
At present, persistently high inflation in Europe and the United States has been affecting the domestic production activities of India's agricultural and manufacturing industries, and is driving food and energy-led inflation to soar to 7%, which is a major challenge for the Indian economy and financial markets, while also addressing the risk of non-performing loans in the banking system, the data showed.
According to the latest data from the Department of Statistics of India, inflation in India was 6.95% as of April 15, 2024, which is the highest level in 17 months. India's inflation rate has been on an upward trend over the past year, mainly due to rising global commodity prices, soaring energy prices due to regional conflicts around the world, and a rebound in domestic demand, for which the Reserve Bank of India (RBI) has taken steps to curb inflation, including raising interest rates. However, these measures could have a negative impact on economic growth, with the consequence that India's debt stress would increase exponentially.
The RBI now finds itself in a tricky position as it wants to raise interest rates to curb soaring inflation, but at the same time, India's volatile financial market situation could slow real economic growth, which led the RBI to leave the central bank's benchmark interest rate unchanged at 6.5% at its March interest rate meeting, analysts said.
According to Refinitiv Eikon, the Indian rupee depreciated 15.2 percent against the dollar in the year ended April 18 and is now trading at 82.87 rupees per dollar, while the MSCI Emerging Market Currency Index fell 8.5 percent.
Some economists linked to BWC's international team of Chinese explained that after more than 30 years of development, India has become a pole of world economic growth, but much of this growth is due to the easier access of Indian companies and capital to the Western world.
All the evidence suggests that labor costs in India may seem cheap, but the chaotic management of this economy has meant low productivity and a three-year low labor force participation rate, with the result that India's manufacturing plants and functions, including those in the private sector, are full of chaos and waste.
According to the explanation of the US financial website Zero Hedging, the core crux of India's economic fragility is that it is trapped in the black hole of the dollar debt trap and wants to exchange interests with Wall Street groups, but India's external reserves are burdened with external debt of more than 70% of GDP, and has been rated by international institutions as the country in Southeast Asia that needs the most fiscal consolidation.
According to a report released by the IMF in March, India has the highest debt ratio of any emerging market, and as of the fourth quarter of fiscal 2023, India's general government debt has surged to 78.3% of GDP, the highest level since 2018, and this series of signs suggests that India may be in recession due to debt distress.
This shows that the high growth of the Indian economy in the past is the accumulation of huge dollar debts, which will exacerbate the volatility of the Indian market and squeeze out international investment in the process of the United States starting to harvest India, because the Indian economy relies on the accumulation of risk loans and foreign debt to expand economic growth, but India does not have a wide moat of foreign reserves, and in the context of the United States beginning to harvest India, even the Reserve Bank of India has to admit that they are almost powerless to control the decline of the Indian rupee.
According to data released by the Reserve Bank of India on April 15, as of March, India's external reserves were $573.2 billion, down 13.1% from the same period last year, a new low in the past two years, which indicates that India still can't stop the rupee from continuing to fall under the loss of 14% of India's external reserves.
This indicates that India's external debt service costs have begun to increase exponentially, the risk of default has soared, and it is likely that US capital will harvest wealth, making India's equity and bond exchange market at risk of a crisis, which also makes a large number of wise investors withdraw from India ahead of schedule. For example, European and American manufacturers, which control most of India's manufacturing profits, have been withdrawing since last year, and behind this is the dilemma of India's high economic debt.
We have noticed that there have been numerous reports of foreign companies divesting India's manufacturing industry for several months, such as Disney's withdrawal from India, following Foxconn's abrupt halt to a $19.5 billion chip factory project in India last July.
Recently, the refusal of car companies such as Ford, General Motors, Harley-Davidson, BYD and Tesla to cooperate with India has been widely reported by the media, which has further exacerbated the prospect of a possible recession in India, which also made India's foreign direct investment inflows in the 24 months to March this year at $48.72 billion, down from $59.6 billion in 2021.
It is clear that these moves by global manufacturing companies to withdraw from India have dealt a major blow to the Indian authorities' ambitions to attract foreign investors to achieve the world's factory of the world, and these events are definitely a major setback for 'Make in India' and have raised suspicions and follow-ups from other foreign companies investing in India, expressing concerns about India's investment environment, tax disputes, procurement rules that restrict competitive choices, the business environment, etc.
Given India's poor social structure, infrastructure and labor force participation, the "potential" of made-in-India world factories is overestimated, the analysis said.
Foreign funds, including manufacturing, have withdrawn nearly Rs 6 trillion worth from India since 2022, when India began tightening monetary policy, more than three times the net outflows during the 2008 U.S. financial crisis and the highest annual withdrawal in at least 20 years, according to data released by the National Securities Depository Corporation of India on April 16.
For example, Wall Street institution Citibank has downgraded the Indian stock market, some analysts said that the current valuation of the Indian stock market is high, and the earnings of Indian companies are poor, and it has reached the stage of profit-taking, according to data disclosed by the agency on February 27, overseas investors have sold a net $3.8 billion (about 31.5 million Indian rupees) worth of Indian stocks since the fourth quarter of 2023 alone, which is one of the largest outflows in emerging markets.
Some investors in India told BWC's Chinese international financial team that they have been making various investments in India for nearly 25 years, but now they are withdrawing from India because of the poor economic and business environment, the liquidity of financial markets is drying up, industrial production growth is sluggish, bank debt and credit problems are prominent. And this is one of the reasons why a significant number of smart investors have quietly withdrawn from the Indian market.
For example, in August 2023, Indian authorities abruptly announced restrictions on laptop imports to boost local production, a measure that caused panic in the industry, and interventionist policies like this one would also demoralize investors.
For example, at the beginning of last year, Wall Street short-selling institutions in the United States continued to short-sell the Indian chaebol Adani is the most vivid example, so this series of signs indicate that the Indian economy and manufacturing industry may be brewing a huge recession storm, then the Indian economy is likely to recession for 20 years, especially in India's export industry. For example, hiring in export-dependent manufacturing sectors such as engineering, textiles and software has also slowed, as evidenced by the fact that India's exports of manufactured goods fell by 7% year-on-year in the last six months. (ENDS)