Global Bond Markets Are Wobbling Again
The markets have now already created a bottom of sorts thanks to the expected cuts in goods and services tax rate
On Episode 668 of The Core Report, financial journalist Govindraj Ethiraj talks to Co-Founder and JMD at Wazir Advisors as well as Paul Hickin, Chief Economist and Editor-in-Chief at Petroleum Economist.
SHOW NOTES
(00:00) Stories of the Day
(01:09) Global bond markets are wobbling again, India gains in anticipation of GST rate cuts
(04:13) Why gold prices are set to rise further
(06:28) India’s services sector continued its strong run, hitting a 15-year high in August on new orders and rising output led by international demand
(07:38) Why Indian apparel companies have to go multi global location
(11:50) New oil finds in South America are bringing in fresh supply in the face of fresh shifts in demand and supply
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Thursday, the 4th of September, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital, and we're not seeing so much rain now. Let's see how the rest of the week holds.
Our top stories and themes.
Global bond markets are wobbling again. India gains in anticipation of goods and services tax rate cuts.
Why are gold prices set to rise further?
India's services sector continues a strong run, hitting a 15-year high in August on new orders and rising output led by international demand.
Why Indian apparel companies may have little choice but to go multi-global location?
New oil fines in South America are bringing in fresh supply in the face of new shifts in demand and global oil supply.
Global Bond Markets Are Wobbling
The markets are now already running up and creating a bottom of sorts thanks to the expected cuts in goods and services tax rates, some or all of which we should start seeing, maybe even this evening if all goes well at the GST council meeting that's on right now, which is also the problem.
If the rates are a disappointment in any way, including for some specific sectors as opposed to what they were expected, we may see some pullbacks in stock prices. Take away the GST rates, there is no real market trigger right now and most macro signals, including a higher than GDP growth rate of 7.8%, thanks also to a change deflator that's in the latest quarter, good monsoons and a relatively stronger rural demand, all of that is priced in. So yes, much is riding on the GST rate cuts, which India's Prime Minister Narendra Modi announced on August 15th, Independence Day, as an upcoming Diwali gift and that's at least for the next few days.
Diwali is on the 21st of October. On Wednesday, the benchmark indices closed higher, thanks in some part to metal and pharmaceutical stocks. At close, the Sensex was up 409 points to close at 80,567.
The Nifty 50 was up 134 points to close at 24,715. The broader indices were also up. The Nifty mid-cap 100 was up 0.69%, small cap was up about 0.9%. So the rupee was also on a slightly stronger wicket on Wednesday, even as most Asian currencies were weaker, thanks also to a weakness in the dollar index and of course back home, a strong market that is stocks.
The currency closed at Rs.88.7, that's up 0.1% from Tuesday's close of Rs.88.15. It hit an intraday high of Rs.87.99 before going below the 88 mark, according to Reuters, which added that the rupee is amongst the worst performing Asian currencies this year and had hit an all-time low of Rs.88.33 per dollar on Monday. Meanwhile, global bond markets are wobbling once again, as we said, in an international bond sell-off abated after a run-up in benchmark borrowing costs fuelled by concerns over government debt levels, according to the Wall Street Journal. Moves have been more measured this week but on the long end, Japanese debt is at a record premium.
The US 30-year yield is back at 5% and many European bonds are at multi-decade highs, according to CNBC. In the latest moves, that's Wednesday morning, the 30-year treasury yield pulled back after hitting 5% and then in Europe yields on longer-dated debts stabilised after hitting again decade-plus peaks in the previous session. Uncertainty around the Federal Reserve's future independence and what this means for inflation and interest rates has added or rather provided more jitters to the US markets, according to the Wall Street Journal.
What's keeping gold prices up?
Gold and silver are back at record highs. To recap, gold prices hit a record $3,352 per ounce on Tuesday, extending a rally that's now taken gold up 90% since late 2022, according to Reuters. So going forward, the cues for prices remaining where they are or rising are quite strong.
Central bank purchases and strong investment demand visible inflows into physically backed gold exchange-traded funds are the key drivers, this Reuters report says, which pulls in data from a host of sources, including Metals Focus and the World Gold Council. Of course, there is this overall uncertainty, thanks to the new US tariff policy approach, which is obviously good for gold. Annual net purchases of gold by central banks have now crossed 1,000 metric tonnes each year since 2022, according to Metals Focus, which expects them to buy 900 tonnes this year.
That's twice the annual average of 457 tonnes in 2016 to 2021. That's the five-year period from 2016 to 2021. Moreover, many countries are seeking to diversify from the dollar.
And also official numbers according to or other reported to the International Monetary Fund only reflect about 34% of 2024 total central bank gold demand estimate, according to the World Gold Council. They, that's the central banks, have contributed 23% to total annual gold demand in 22 to 25, that's the last three years, double the average share recorded during the 2010s. On the other hand, demand for gold for jewellery, the main source of physical demand, fell 14% to 341 tonnes in the second quarter of 2025, the lowest since the pandemic hit the third quarter of 2020, as high prices deterred buyers, once again, according to the World Gold Council, quoted by Reuters.
So high prices usually lead to demand falling. And most of that happens, or rather is triggered by the big markets of China and India. There has been a shift in appetite for different products in the retail investment market, but total purchases remain robust.
Investment demand for gold bars rose 10% in 2024, while coin buying fell 31%, according to the World Gold Council, which said the trend is extended to this year, according to that comprehensive report from Reuters. Service sector high. India's services sector hit a 15-year high in August on new orders and rising output led by international demand.
Service Sector High
The HSBC India Services Purchasing Managers Index, or PMI, was up to 62.9 from 60.5 in July, according to S&P Global data released on Wednesday. The reasons for this is demand buoyancy, efficiency gains and greater inflows of new business. And this is, of course, the strongest growth since 2010.
According to that report, new orders grew in August for the 49th month in a row and the fastest pace in more than 15 years. HSBC analysts said that the broad-based expansion in international sales bolstered overall demand, which prompted Indian services firms to hire additional workers. And reflecting higher labour costs and robust demand conditions, both input and output prices increased substantially in August.
According to that report, export orders also rose at the third fastest rate since this question was added to the survey in 2014, that's 11 years ago, with higher demand coming from clients in the United States, Europe and West Asia.
Apparel Stories
India's apparel industry is amongst the handful of sectors that is facing the worst brunt of the slapping of 50% tariffs by the United States on India's garment exports. Even if the 50% were to go back to 25%, things would not be much easier given the high cost structure for most apparel makers, more so small and even big too.
India, of course, is now at a tariff disadvantage as well compared to other countries in the region who are competitors and on whom the tariffs are much Indian companies have to bet on multiple locations for manufacturing as some already are. Prashant Agarwal, co-founder of consulting firm Wazir Advisors and a former textile industry man, told my colleague Katya Naidu on the sidelines of the Elara India Dialogues 2025.
TRANSCRIPT
Prashant Agarwal: See, one of the important trends will be that one has to be nimble and flexible in today's world. You should be flexible enough to change your buying country or brand from one to another. You can't be dependent on one.
So this is one trend which people have come across. The other is that regional cooperation will increase.
Because when you are regionally cooperating, the supply chain becomes more agile from that perspective. Third, people have understood that manufacturing competitiveness is important. So you have to set up first good factories of scale.
Second, you have to be present in multiple countries. That's also a very important trend that first you have to develop a strong base in your own country. Then after that, in certain times, you should be able to supply from some other base also.
Diversification. Maybe somebody in India should also have a factory in Indonesia, Bangladesh or Vietnam or Cambodia or Egypt. These are some of the destinations where even buyers are saying that you are a credit worthy supplier.
Let's be more diversified to be able to supply.
And it gives buyers the brand more flexibility to stick to you in these times. So otherwise, if I suppose I'm trying to ship some of my orders to Bangladesh in tough times, that would be considered a transshipment or will. But if you have your own facility, you can be supplied from their side.
So I think this is something you have to rethink. So I think you have to go on the drawing board and work because world order is changing post 2025. So world order does not remain the same.
Katya Naidu: Lastly, if you had to give an outlook, what would it look like?
Prashant Agarwal: So I would say because, you know, just to give you a perspective, we have worked a lot in Africa also. I see Africa while the buyer wants to develop. They have always had an advantage at the AGOA, but they are far way behind in terms of how they will develop their competitiveness.
So today, the competitiveness will be more within the ASEAN region, which we have to see within selected countries. So I think if you are a competitive manufacturer, that's the way to go. And for the future lies with those who are able to develop scale.
Maybe you have a larger number of factories, but you are able to scale, have a better product mix, are more, and are able to give more services. For example, a lot of buyers are talking about vendor managed inventory. But if you have that set up, then only you are able to because the buyer wants to focus more on consumers, how he's able to sell more.
If he grows more, he'll give you more orders. So I think supply chain deepening has to happen. And what you have to do as your main responsibility is getting well defined.
So I think you have to work beyond. And with AI coming, with digitalisation coming, these things become easier. So you have to get into smarter factories.
A lot of AI and digitalisation is coming in the garment industry also.
Lots of Oil
Oil prices fell about 2% on Wednesday ahead of a weekend meeting of the Organisation of Petroleum Exporting Countries plus producers that's expected to consider another increase in production targets in October.
Brent crude was down $4 to $67.98 so it's now under $68 a barrel that's on Wednesday afternoon. Eight members of the OPEC plus will consider further raising oil production at a meeting on Sunday according to sources who spoke to Reuters as the group seeks to regain market share. While this is where things are right now, overall supply conditions are looking good for oil in the near future with new finds and some demand shifts.
So what could that mean for prices, of course, and consumption? At the Elara India Dialogues 2025, I caught up with Paul Hickens, editor-in-chief of Petroleum Economist in Mumbai and I began by asking him how he was seeing some of the big finds, particularly in South America and the other older fields and how they were performing.
TRANSCRIPT
Govindraj Ethiraj: Well, thank you so much for joining me. So, there's a lot of new oil being discovered around the world, including in South America, where, again, there's fresh investments coming in, the big giants have stepped up their own on-ground investments there. There's oil fields being explored and potential discoveries off the east coast of India as well.
But I'll come to India in a bit. So, what's happening? I mean, are we seeing now globally a new wave of oil discoveries?
Paul Hickin: It's a great question, Govinda. What I would say is that we've actually seen a lot of decline in, actually, a lot of… these things go in waves.
We've seen a lot of decline upstream in some ways. The UK's been in decline. In some ways, India's been in a slow decline as well.
And even the U.S. now is sort of… the whole heyday of U.S. shale, that wave seems to have at least slowed down, and it's not the same as it was. It's a much more mature basin in the Permian and elsewhere.
So, I think there's actually been a sort of slowing down in the trajectory of, actually, new discoveries in many ways. And what you've seen now is, yes, Guyana has been a big new fresh wave. And the geology there, I think it's all about the geology.
And the similar geology is also in some parts of southern Africa. And Namibia is also a big area where they're seeing first oil around maybe 2030, and around that sort of what's called the Orange Basin. So, I think there are new discoveries.
I think these things come in waves. The UK was nothing. Then, also, in the 1970s, there were big discoveries, and now it's in a slight decline.
Govindraj Ethiraj: You mean the North Sea?
Paul Hickin: North Sea, yes, sorry. Yeah, the North Sea. So, you see the North Sea, there were big discoveries in the 1970s, and now that's been almost maxed out, and there's a decline.
The same things with even U.S. shale. The sweet spots are starting to be fully exploited, and now there's a kind of maturity in the U.S. shale, but shale plays now. So, we're seeing these things go in waves, generally.
You could argue necessity breeds mother invention. So, there's kind of this idea that maybe people start looking elsewhere, that there's more of an interest in Africa. It's always been a big frontier play.
There's always been that hope of discovering more, and we're seeing some breakthroughs. Indonesia has been seeing some big interest as well. So, people are looking further afield.
I think there's new technologies coming to look further in deep water, for example, bigger breakthroughs in deep water, which is what you're seeing through the Gulf of Mexico slash America. So, there's actually better technology now, better ways of finding some of this oil as well. So, it's technology.
It's companies shifting away from maybe the easier finds as the shale patch starts to kind of reach maturity. So, there's kind of a lot of things going on there.
Govindraj Ethiraj: And how do you see this in the context of overall global oil production right now as well as projected in the next couple of years?
Paul Hickin: Yes, that's a good question. So, I would say that what we're seeing right now is actually that we are kind of in a trickier phase for supply. Yes, the Americas are still big on growth.
Brazil, like I mentioned, Guyana, Canada, and the U.S., we're seeing U.S. where prices are around WTI, around the $60 barrel mark, where it starts to affect break-evens and starts to affect production. We're seeing a slowdown, a huge slowdown in U.S. production, especially in the shale. Deep water long cycle investments seem to have their own logic and economics which keep them going.
But shale is a bit more of a marginal producer that can be slowed down. And we're starting to see that in terms of functional price. But realistically, Guyana, Brazil, and others will continue going.
And I think you're still going to see a million barrels a day of supply growth, especially coming from the Americas. So, I think that's the big story across the Americas. Elsewhere, it's looking less convincing, I would say.
Even when we talk about Africa and Namibia, that's not until 2030. So, that's some way off some of these discoveries, some of those areas. And there could be more breakthroughs.
But the Americas is where the real growth is for the next few years.
Govindraj Ethiraj: Right. And I'm going to come to the demand side in a moment. And India, too, has been looking at the Andamans, for example, and sees that as a potential find.
What's your sense, your vantage point?
Paul Hickin: Yeah. So, I think what India has done has been very positive. They've really, under Mr. Puri in the last few years, they've really tried to incentivise and encourage exploration. The upstream side, they've got new licensing rounds, new incentives for trying to encourage international players, BP, Petrobras. I was in Energy Week, and these were the big companies signing deals. There's clearly interest in using the expertise from outside.
Like I was saying, the new technology is helping to find new oil, find new plays. So, there is actually a real optimism. And there's been some small hopes, some positivity coming through that.
Yes, India's upstream has been a bit like the North Sea. It's been a bit in decline, and they're trying to reverse that. I think they've got more possibilities than the North Sea to reverse it.
But still, it's a tricky game finding the oil. I think there's some confidence that more oil will be discovered and found, though.
Govindraj Ethiraj: Just to come to the present, how are you seeing the current state of the market, both now in terms of supply? I mean, I think you've given us a longer-term sense of supply, but the current market in terms of supply and demand?
Paul Hickin: Okay, so if we talk about supply quickly, I mean, again, America is still the big driver of growth this year and next. That's the big chunk. And then you've got the question marks really still over US production because, you know, there was a big expectation at the start of the year that the US would still grow quite significantly.
That growth is probably not going to materialise. We may see a couple of hundred thousand barrels a day over this year, but not much more. It could even be flatlined, so it could even be a bit of a decline in the second half of the year, depending on the function of price.
So that's the big question. Probably see about a million barrels a day of supply overall. And then you've got demand, which there's a big uncertainty on the demand side.
You've seen IEA saying 0.7 million barrels a day. You've got OPEC saying 1.3 million barrels a day. Truth is probably somewhere in between.
There is still a lot of uncertainty over China and China's economy, although it's still buying a lot of oil to fill up its SPRs. And then you've got questions over US inflation versus economic growth, what the Federal Reserve is going to do. So there's still some uncertainty about that demand picture as well, but if those two things were to play out across those uncertainties, you're probably looking at fairly balanced.
So then the question relies on OPEC Plus and what they're going to do. Are they going to pause until the end of the year, or are they going to continue bringing back the barrels? The likelihood is they're going to take a wait-and-see approach and see where prices are.
Although OPEC doesn't target prices, obviously it's critical to their thinking, and they won't want to see oil prices drop below $60 or too far below $60. So I think the OPEC question will hang over the market if we see prices starting to drop further below, out of the $60 to $70 range, into the $50 to $60 range.
Govindraj Ethiraj: So the elephant in the room, so to speak, is Russian oil. Now, at this point of time, America is putting pressure on India to stop buying Russian oil. Roughly more than 35% of India's oil imports are coming through Russia right now.
This was obviously much, much less before Russia's invasion of Ukraine. Now, my question is, if, let's say, India were to not buy so much Russian oil or cut down drastically, what happens to the market?
Paul Hickin: That's a great question. In that scenario, then probably some of the Russian oil will go to China. China would probably buy more, but it probably couldn't take everything.
Then the question is, realistically, what happens? Yes, realistically, some of the oil might find a way, if they sell it cheap enough to other places, there's always ways of the oil going through the dark flea and navigating those sanctions. But at the same time, the dangerous scenario is that prices would spike.
If not all that oil was to find home, then the risk is of a spike in prices, and that still could happen. Yes, there would be OPEC having roughly 4 million barrels of their spare capacity, mostly in Saudi Arabia and the UAE, and those OPEC could quite quickly bring back barrels to mitigate any kind of spike up until a point. That would probably allow time to negotiate or get some wiggle room, because Trump also won't want prices to spike.
There's a lot of moving parts there, but I think politically Trump won't want prices to spike, so he may change tack. Obviously, there's that 4 million barrels of their spare capacity, and OPEC could unwind quickly and bring back all those barrels, especially Saudi Arabia and the UAE.
