The US Fed as expected has not raised interest rates. The important takeaways from this meeting are as follows :
The above diagram shows the dependence of the world economy on China.
As it is very clear from this diagram China is one of the most important growth engines of World . Any demand destruction in China will have massive ripple effects across the globe. No wonder with the slowdown in China the world commodity prices fell like a stone .
The world will keep a close watch on China and every piece of data that emerges from this country. As the sentiments turn extremely negative at some point we will have ‘ better than expected data ‘ that will allow the market to bounce back . This is what we saw in the recent past when commodity companies like Glencore , Hindalco ( India Aluminium co ), Vedanta tried to move up. These bounces are also supported by short covering .
However one has be clear in their mind that these are trading calls and not necessary investment calls . The fundamentals still remain extremely weak for commodities and more so for commodity related companies.
Point to be noted is that most of the major global commodity companies have gone for global expansions when commodity prices were much higher . Thus there are assets on their books that have impaired .
Also most of the expansion was backed by low cost credit . Thus we have the dangerous combination of assets that are much below their book value and high debt whose cost is set to go up .
This problem will not be restricted to commodity companies alone . Recently we have seen Deutsche Bank Q3 losses that have taken the market by surprise.
“An impairment of the carrying value of Deutsche Bank's 19.99% stake in Hua Xia Bank Co. Ltd. of approximately EUR 0.6 billion. This reflects an updated valuation triggered by a change of the intent of the holding as Deutsche Bank no longer considers this stake to be strategic. “
A quote from Deutsche Bank's review of Q3 results .
As we see companies / banks exposed to China in particular and commodity prices in general are the next in line for selloffs. In India we have seen companies like Tata Motors selling off due to this . Going forward we have to look deeper into the balance sheet of the banks for possible write offs that are yet to be factored in.
However for today bad news is good news and Asian markets may cheer continuation of low global interest rates .