Asian markets are down 3-7%, the SGX Nifty future is trading ~ 3915, down 3.5%. With cost of capital going up at a rapid clip, watch the interest-rate sensitive stocks.

• DNA: Rupee hit by an invisible force

. . . the one-year forward rate in the domestic market is 46.70/$1 (46.05 is the rupee rate plus a 65 paise forward premium), but in Hong Kong, the same forward is quoting at 47.68/$1 —- a clear arbitrage of 98 paise. The RBI can’t do anything to stop the trades since they are executed outside its jurisdiction, on foreign shores.

“It’s illegal so we can’t even talk about it. But it’s a peculiar situation because the rupee is not fully convertible here, but countries where these trades are settled have fully convertible currencies. Also, the RBI can’t just go ahead and legalise these trades because it would mean that they are jumping the regulation just because there are some players using this route,”

. . . volumes have at least increased eight times from $100 million in 2003 to more than $800 million a day now.

No end to stupidity on currency regulation.

• Bloomberg: CRB Commodity Index Falls, Down for Year, Erasing Record Rally

Gasoline, crude oil and copper plunged and the Reuters/Jefferies CRB Index of 19 commodities erased its gain for the year.

The gauge has tumbled 27 percent since reaching a record high on July 3, dropping into a bear market as tighter credit markets and bank losses threatened the global economy. Crude oil settled at its lowest close since February, cotton touched the lowest price in a year, and gasoline dropped to its lowest level since March.

What is interesting is that even gold, for it’s ’safe haven’ status, isn’t doing all that great. As Hussman says, information is in the divergences.

• NY Times: Fed Takes Steps to Aid A.I.G.

The complex discussions, continuing into the night as a deal was sought before United States markets open on Tuesday, involved New York state regulators, federal regulators, private equity firms and Wall Street banks that rely on A.I.G.’s ability to honor its derivatives contracts, as they do with Lehman Brothers.

Ratings agencies had threatened to downgrade the insurance giant’s credit rating by Monday morning, a step that could allow counterparties to A.I.G.’s swap contracts to require A.I.G. to post collateral of up to $13.3 billion. One person close to the firm said that if such an event occurred, A.I.G. might survive for only 48 hours to 72 hours.

A 90-year old company whose future is being counted in terms of hours!

• Wealth Bulletin: Firms set to earn up to $9bn in ‘dry powder’ fees

Buyout firms have amassed $450bn of committed money to their funds that has yet to be used, according to data provider Preqin. This so-called “dry powder” of uninvested money has been committed by investors keen to tap into average returns over the past few years of about 25%.

Preqin estimates private equity firms could be paid between about $6.75bn and $9bn on the $450bn. Private equity firms usually earn between 1.5% and 2% in management fees at the same rate as drawn-down money invested as the equity in buyouts.

Reminds me of the gobs of money that mutual fund managers are making this year for doing nothing.

• Bloomberg: JPMorgan Recommends Options as Indian Rupee May Slide

Investors should buy rupee put options granting the right to sell the currency against the dollar, said Vikas Agarwal, a strategist at the third-biggest U.S. bank. The rupee will fall to a two-year low by Dec. 31 as funds pull money out of emerging markets.

JPMorgan recommends buying options as “insurance” against such a slump, forecasting the Indian currency will drop to 45 per dollar, its lowest since November 2006, by the end of this year.

Note that the rupee has now dropped to 45.4!

• Hindu Business Line: Some steel cos cut prices by Rs 2,000

Primary steel makers appear to be under pressure from softening global prices. On Wednesday, JSW Steel and Ispat Industries said they have cut prices by about Rs 2,000 a tonne with effect from September 1.

Prices for long-term contracts have been cut to the extent of Rs 2,000 to Rs 3,000 a tonne. Following the price cut by the private producers in the long-term contracts, spot prices were also witnessing a downward moment in the last few days, said the SAIL official.

“we expect steel prices to witness a sharp decline before settling at $700-750 a tonne by the end of the financial year 2009.”

So much for the expected 5% price hike, eh?

• Morgan Stanley: NRI Remittances – Key to India’s Current Account Stability

NRI remittances have shot up to US$40.8 billion (3.5% of GDP) as of F2008 (12-months ended March 2008), compared to US$12.3 billion (2.7% of GDP) as of F2000. NRI remittances were about 2.6 times net foreign direct investment and 1.4 times portfolio investment in F2008.

. . . the total NRI population could be easily larger than 20 million. Even if assume a conservative income stream of US$10,000 per capita, the total annual income of this population should be above US$200 billion.

. . . the average utilisation pattern of remittances sent to India includes maintenance of families of migrants in India (54% share in total), bank deposits (20%), investment in land/property (10%), investment in equity shares (3%) and other uses (13%).

Remittances have been in narrow range of 2.5-3.6% of GDP over the last 10 years.

Fascinating & often overlooked. With the rupee getting weaker by the day, at some point it will start looking attractive again for NRIs.

• Economic Times: AMFI move to allow change of planner hits funds

As prescribed in AMFI’s best practices, the repealment of no-objection certificate (NOC) for shifting to a new financial planner (a mutual fund distributor or agent, in this case) has left a hole in the earnings kitty of large distributors.

In both the cases, the distributor (with whom the investor has account previously) loses out on loyalty commission or trail commission. In addition to the 2.25% entry load, fund houses pay around 0.5% per year of current investment value, as trail commission to the agents, for the period the customer stays invested in the fund.

Such nonsense this NOC. Egregious. Good riddance of bad rubbish.

• Business Standard: Copper consumption growth rate likely to decline to 9% on slowdown

The economic slowdown, coupled with a low manufacturing and housing sector growth, is likely to reduce the copper consumption growth rate to 8-9 per cent this financial year as against 15 per cent in the last three years.

A wide gamut of industries including electrical (36 per cent), telecom (20 per cent), transport (8 per cent), building and construction (9 per cent), consumer durables (6 per cent), engineering (9 per cent) and others (12 per cent) consume the red metal.

Copper is one of the few commodities that has not corrected significantly in 2008. If & when it does, watch out - it’s not called Dr Copper for nothing!

• DNA: ‘Derivatives business is full of beautiful lies’ (Interview with Satyajit Das)

“Hedging provides certainty —- of death.

Traders lie to sales people and to risk managers. Risk managers lie to the people who think they run the place. The people who run the place lie to shareholders and regulators. Investors and corporations generally lie to themselves about their understanding of derivatives and why they are using derivatives.

The same (sub-prime lending) business model was used in private equity loans, commercial property and infrastructure and it is all going to have to be unwound.”

• Economic Times: Options outdo futures for first time in 8 years

. . . options registered a total volume of Rs 3.12 lakh crore in August, which is higher than that of futures at Rs 3.01 lakh crore. Even the average daily turnover of options (Rs 15,605.09 crore) has moved ahead of futures (Rs 15,022.44 crore) for the first time ever in August.

“Day traders are left with no options but to trade in options since trading in any other category of products attracts too much STT for a transaction to be profitable.”

I would think that the recent flood of structured products also has helped (index) option liquidity.

• NSE: FX Market Tracker

Liquidity in the newly launched rupee (USDINR) futures at the NSE is still low, but it’s too early to draw conclusions. Interesting that 12-month futures are being traded above Rs 45.

• Economic Times: Steel export duty in works

The government is considering re-imposition of 15% export duty on flat steel products, including hot-rolled coils (HRC) and cold-rolled coils (CRC), to disincentivise their exports and boost domestic supply.

The steel exports stood around 4.5 million tonne (mt), of which 3mt were flat steel products. The export duty is expected to release an additional 2 mt of steel in domestic market that would help ease pressure on prices.

And if that’s not enough: India May Ask Steelmakers to Cut Prices If Global Rates Decline. My take on this continues to be that we’ll see a fast & furious drop in steel demand & hence steel prices in India.

• Bloomberg: Taylor Rules Currencies, Not to Be Confused With the Other Guy

Taylor’s International Foreign Exchange Concepts Inc., the biggest currency hedge fund company in the world, is navigating through some of the wildest fluctuations the currency market has seen since the dot-com crash in 2002.

“It’s become much harder to make money on the majors,” Taylor says. “They are not totally random, but it’s damn near.”

Taylor bets only a fraction of his assets each time. His trades usually last a couple of weeks. His models flash when a currency’s movements suggest it will continue on the same path and again when the move looks likely to reverse.

• PIMCO: The Narrowing Ecologies of Global Growth

Lots of fun ongoing in Western markets: Dollar Delight

Today the Dollar is having its best day since July 2005 with a gain of 1.167%.

Most hosed is the Euro, followed by crude oil & copper, silver and finally gold; here are the highlights -

The euro fell the most in almost eight years.

The Russian ruble fell by the most in 2 1/2 years against a dollar-euro basket.

Light, sweet crude for September delivery lost $4.03 to $115.99 a barrel.

Gold futures for December delivery fell $16.30, or 1.9 percent, to $861.60.

Silver futures tumbled more than 5% to 2008 lows.

Dollar bears & oil bulls are re-learning this lesson: The trend is your friend, until it bends!

• Bespoke: US Dollar Index Looking Up?

Note that the rupee has actually strengthened against the dollar this week (now at ~ 42). But then the rupee’s moves are determined more by the RBI than anything else. Gold, of course, is weak - as are most commodities.

• Bloomberg: Oil Companies May `Panic’ on Tanker-Rate Outlook: Chart of Day

Oil-tanker rental rates may rise after last week’s 46 percent slump spurred owners to slow their vessels, reducing supply and increasing costs for oil producers and refineries who hire the vessels.

Owners are telling captains to sail more slowly, according to three shipbrokers. The last time that happened, in the final months of 2007, rental rates posted the fastest two-month gain in at least 16 years, increasing costs for oil producers seeking to ship supplies to refineries.

The Baltic Dry Index continues its’ steep decline.

• Business Standard: Commercial rentals slide 30%, realty players don’t know!

Rentals in shopping malls have come down by up to 30 per cent in the past couple of months as supply outstrips demand, but realty players doggedly refuse to acknowledge such a trend.

Hindustan Sanitaryware Vice President and Business Head D K Jairath said the rentals have softened and the company expects another 15-20 per cent fall over the next two quarters.

Yay, supply & demand actually matter!

• Economic Times: Jobbers may lose jobs to technology

The biggest threat these jobbers now face to their livelihood is technology. In June this year, the NSE said it would now allow “decision support tools/algorithms, wherein the orders may be placed for execution for two or more securities/contracts as the case may be in capital market and/or futures & options segment simultaneously.” In layman terms, it is the green signal for ‘program trading’ by institutional investors in the Indian market.

This clearance is linked to the stock market regulator, SEBI’s approval for Direct Market Access (DMA), which allows institutional clients to place their orders on the exchange trading system through the broker’s infrastructure, without manual intervention by the broker.

• Hindu Business Line: Murdoch launches DJ India Titans 30 Index

An index of 30 leading Indian company stocks, Dow Jones India Titans 30 Index, was launched today by Mr Rupert Murdoch, the Chairman of media conglomerate News Corporation. “The Dow Jones India Titans 30 Index includes 30 largest and most liquid stocks traded in India. The selection to the index will be based on rankings by float-adjusted market capitalisation and 12 month average daily trading volume,”

Unlike other benchmark indices such as the Sensex, Nifty, Morgan Stanley India Index, the new index has 10 per cent weightage cap for individual securities.

• Business Standard: Big brokers eye currency futures

Several big brokerage houses, including Religare, Motilal Oswal and Karvy, have expressed their intention to offer currency futures broking to the National Stock Exchange (NSE). In turn, NSE along with the Bombay Stock Exchange (BSE) and Financial Technologies Group has applied to Sebi for starting currency futures.

. . . for the retail clients, the brokerage could work out to Rs 15 to Rs 55 a contract, while for the institutional clients it could work out to Rs 5 to Rs 10 a contract. As per the guidelines, the contract size is $1,000. The market timings will be from 9 am to 5 pm.

The daily average turnover of the Indian forex market stands at $34 billion, and has grown at a compounded annual growth rate (CAGR) of 37 per cent over the last seven years.

• Portfolio: What is a Covered Bond?

With a covered bond, the bank doesn’t sell its assets (in this case, its mortgages); rather, it continues to own them, and it borrows money against them.

There are two good things about covered bonds. The first is that because they’re secured rather than unsecured, they’re less risky than plain vanilla bank debt, which means that they constitute low-cost funding for the bank in question. And the second is that because the mortgages remain on the bank’s balance sheet rather than being securitized and sold off into the market, no one’s trying to sell mortgages in an environment in which the very concept is borderline toxic.

• Business Standard: Time to pay the piper

The US national debt as of March 2008 stands at $9.4 trillion — over $30,000 per citizen. Of the $4.7 trillion in private hands, $2.4 trillion (51 per cent) is held by foreign investors. Japan holds around $600 billion (24 per cent) and China holds $500 billion (around 20 per cent). The UK, Brazil and oil-exporting countries own about 6 per cent.

The dollar’s share of reserves has fallen from a high of 72 per cent to around 61 per cent.

The IMF estimated that Gulf Cooperation Council (Saudi Arabia, the United Arab Emirates, Qatar and other Gulf States) may lose $400 billion if they decide to stop pegging their currencies to the dollar.

When in debt, inflate your way out?

• Bloomberg: Crude Oil Trades Near 12-Week Low on Falling Gasoline Demand

U.S. motorists drove less for a seventh consecutive month in May, as vehicle-miles traveled on all U.S. roads fell 3.7 percent during the month from a year earlier, the Federal Highway Administration said in a report July 28. The seven-month slide is the longest downward streak since 1979.

U.S. refining profits have fallen because oil companies are making more gasoline than drivers need, as a result of running refineries to satisfy demand for diesel.

India, Vietnam, Malaysia and Indonesia have raised prices of diesel and gasoline in the past two months to cut government expenditure aimed at capping fuel prices and keeping inflation in check.

Note that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year.

Big moves in the rupee-dollar exchange rate (now at ~ 42), and therefore gold in Indian rupees:

Among the comments made by the PM after winning the trust vote was the need to ‘control import inflation’. Between that and the fact that the RBI holds $300B+ in dollar reserves, where do you think the rupee’s headed? 41! 40 even. Gold, of course, got hit by a double whammy - a correction in global gold prices, followed by a sharp strengthening in the rupee.

Don’t be surprised if Indian inflation drops much faster than what most people expect.