G20 fails to inspire the market with lack of information

On Friday I wrote a piece stating that Shanghai would be host to a G20 summit meeting involving finance ministers and central bankers of the top 20 largest developed and emerging market economies with much belief that policymakers would reiterate their support for economic growth with measures such as fiscal, monetary and structural policies that would lift the world economic outlook from bleak to prosperous again.

After concluding on Saturday it would seem the meeting failed to meet market expectations by lacking sufficient substance that would ably describe to market participants how policymakers intended on supporting growth or address issues that are currently hindering government's ability to bring about the change needed to boost confidence again.

Policymakers were in agreement that the perpetual nature that both monetary and fiscal policies have taken on cannot remain in place indefinitely and stressed the importance of structural policy in reaching the targeted goal of sustainable global economic growth. We heard ahead of the meeting that German finance minister Wolfgang Schauble said that more focus needed to be put on structural issues arising in each member's economies rather than simply abating the problem by pushing for the continual use of expansionary measures.

This would suggest that member nations have heeded the warning made by Schauble and wish to exhibit a degree of caution when using these measures in the future. The specific measure I suspect being referred to is the much debated NIRP (Negative Interest Rate Policy) we've seen implemented in a number of countries that have been suffering with long term structural issues.

However as much as the policy allows for more flexibility in areas previously thought to have reached its limitations, the market itself has voiced its concerns over its usage and questions whether policymakers and more so central bankers have the right judgement in executing a policy that has yet to be tested, let alone studied by academics.

Although not explicitly stating the obvious, leaders have shown evidence that would lead us to believe that they have made an acknowledgement of the markets concerns and the debate around issues that could cause financial market catastrophe have been noted which will be re-examined carefully over the next few months before further measures are put in place.

I think this was an important takeaway from this weekend's summit but not delved too much into in this morning's commentary with most of the focus being driven towards China and the lack of substantial information over the reform of their economy.

#G20 to tell each other in advance about moves that could devalue currencies https://t.co/GAC22BjAOU pic.twitter.com/h4UTHR4G2z

— EconomicTimes (@EconomicTimes) February 27, 2016

But much of the dismay at the lack of information from Chinese policymakers could be as a result of the upcoming National People's Congress which begins on the 5th March 2016 where the gathering will set the stage for policy discussion amongst top government officials who might have kept mum over the past weekend's G20 summit in favour of proposing new measures to the constituents in assessing support for them as opposed to making the same proposals to global leaders but being unable to secure the backing from the real decision makers.

China's recent drive to shore up confidence in its financial market reforms have been met positively by the market and it is expected they won't disappoint come the weekend. Having come this far I don't envisage authorities passing up the chance to charm the market with added initiatives planned to boost faith in the current transitory phase that has so far dogged leaders on poor execution.

What we've seen over the past two months from Chinese authorities is the realisation that the abrupt nature of reform doesn't necessitate an artificial support of the financial system but rather a more transparent delivery of information in terms of market expectations.

China faces a big test of its reform pledges at a leadership congress this week https://t.co/mV427YtrCb pic.twitter.com/nOB6htzjyd

— Bloomberg Business (@business) February 29, 2016

G20 kicks off in China with focus on global economic turmoil

The G20 summit of finance ministers and central bankers being held in Shanghai kicked off today with much attention drawn on the turmoil facing world leaders as a tougher economic climate makes policy flexibility that much harder. The forum was created to coordinate economic policies amongst the biggest economic nations in the world in an effort to align the direction of the global economy so to allow for greater control through conformity as opposed to dealing with each nation's issues separately.

However against the backdrop of the recently held World Economic Forum held in Davos in January, this meeting contains more substance in the sense that it doesn't allow the main discussions on the global economic outlook to be drowned out by the celebrity activists wanting to push an agenda. The forum brings together those policy makers that have the ability to move markets with their influential positions of power especially when it comes to matters of the economy because without proper execution of economic policy there can be no initiatives aimed at improving or confronting the issues activists highlight.  

With Shanghai being the host city for this leg of the summit a lot is resting on monetary authorities to put on a good exhibition of how it will manage the risks created from a newly reformed financial system that is seemingly unsettling global markets with a horde of problems cropping up. People's Bank of China Governor Zhou Xiaochuan said that the nation wasn't going to devalue its currency the Yuan and provided clarity on the scope of reform happening in the economy.

Xiaochuan's comments reiterates the point that the Chinese government wishes to make, the importance of its nation's financial system to the rest of the world is tantamount to its own success and the current mishaps shown up over the past months aren't overlooked with the need to actively inject confidence into the system.

China seeks to manage economic reform expectations at G20 https://t.co/bmyECwmGzQ pic.twitter.com/tfu97OqDvc

— Reuters Top News (@Reuters) February 26, 2016

But just as important is a coordinated effort from each member nation that happenings to be getting harder with every meeting. German Finance minister Wolfgang Schauble warned that both fiscal and monetary stimulus measures had been exhausted and any continuation of these would present further risks to the world economy. He noted that more focus needed to be drawn on structural issues that needed to be addressed rather than simply fuelling the problem with expansionary programs that have failed so far.

The point highlights a trend facing many developed economies experiencing stagnate activity in both consumer and manufacturing sectors leading to an ever contractionary environment. A certain development from these problematic situations will be an increasing focus from academics on how to mend these challenges going forward however there is no definite time frame for when a solution can be found placing an enormous risk these nations may be stuck with the dilemma for years to come.

Germany opposes any #G20 stimulus plan, possibly putting it in conflict with other nations https://t.co/wY451OguY0 pic.twitter.com/znmwjbdVcZ

— Bloomberg Business (@business) February 26, 2016

The US & China agree to more stringent sanctions on North Korea

Early in January this year I wrote a piece on North Korea's threats to destabilize world peace and in particular the Asian region by detonating what it called a "Hydrogen Bomb" raising the alarm that it has capacity to direct attacks on certain nations, namely the US. This placed China in a tight diplomatic position as a close ally to respond accordingly that would remove doubt that China supports such actions.

China has hit back at dictator Kim Jong Un by agreeing to a string of sanctions that would come down hard on the communist state and suggest that China places greater priority to its place amongst the world's largest economy's than risk being cut off due to its association with it.

U.S. and China have agreed on a resolution for tougher sanctions against North Korea. https://t.co/G3sE26nzji pic.twitter.com/bwgBMTjJRa

— New York Times World (@nytimesworld) February 26, 2016

Chinese markets return to high volatility on uncertainty

Chinese stocks slump more than 6% this morning after movements in the overnight lending rate suggested that liquidity might become constrained going forward adding to the woeful string of economic data that has yet to shower any confidence on investors who have been frustrated following the slowest downturn in economic growth in 25 years.

This after a modest 10% rebound that occurred over the past month reiterating the point that the nation is far from bottoming out as many would like to expect but also the height of volatility currently being experienced due to the uncertain times.

Shanghai will set the stage tomorrow for a meeting by G20 finance ministers to discuss ways of curtailing risks being faced in the global financial system presently which ironically takes place in the backyard of the main contributor which puts pressure on Beijing to put up a show of confidence amongst other leaders that would be suffice to downplay such risks.

In an often complex world of trading where "magical indicators" rule the day the best strategy in interpreting what the market is saying boils down to simplicity. If one considers that the Shanghai Composite took a month to regain 10% of its losses only to give them back in a single trading session, it doesn't take a genius to figure out that sellers are in full control of the direction the market is headed to and it would be wise to project targets to levels of the underside and not the upside.

If we take into account that valuations remain at lofty levels even after the dramatic fall off in price of stocks one could argue that perhaps more downside is the order of the day and trying to find substance that says otherwise would be foolish. The trend is firmly set whilst debates rage on over the variability of returns with the much anticipated comeback failing to materialise.

#China stocks slump more than 6% Thursday https://t.co/QquSkQ8ofX pic.twitter.com/p8D08wzJvW

— CNNMoney (@CNNMoney) February 25, 2016

Bickering in OPEC hurts the chances of a recovery in oil prices

An agreement between Saudi Arabia and Russia to freeze oil output at January levels came as a relief to the market but the legitimacy of the plan is coming under heavy scrutiny after tensions rose as Iran stated that it would not follow the actions of fellow OPEC members in halting production. Relations between Riyadh and Tehran has been growing since the execution of a prominent Shiite that prompted Iranian nationals to torch a Saudi Arabian embassy in Tehran.

Iran presents the most problematic risk to the oil body as sanctions have recently been lifted allowing the country to begin international trade again after an extended absence that crippled its economy. However the intentions of Saudi together with OPEC do not fall parallel to the aspirations of the Iranian government causing friction  and putting serious doubts over the continuity of the collusive agreement.

Saudi Arabia, currently the second largest producer of oil after Russia, stands to lose significant market share if it were to cut deeply into its own production that could dramatically shift the leadership of the oil body out of its hands and into those that cast a shadow over the current status quo. Although it may have lost significant share already in its battle against shale gas producers, the Arab nation prefers to be a friend of the West rather than a nuisance.

As things stand a freeze in output wouldn't do much for the price of oil as the quantities of product lying on the surface would require a huge spike in demand to mop it all up which seems very unlikely given the deary outlook of the global economic climate. So as much as the move was in the right direction more needs to be done to see a proper recovery in oil prices.    

In the wake of the 1980s plunge, oil prices stagnated for nearly two decades https://t.co/gR226ROcjG

— Real Time Economics (@WSJecon) February 25, 2016

Could Japan's economy become worse off than what it is with negative interest rates?

As the market digests the reality that negative interest rates could be with us for years to come concerns over their potential impact are starting to find their way into the financial news with the story below the first of many.

Issues such as cash hoarding isn't new to Japan as the practice has been in place for a few years now with interest rates being so low. However policy changes in both the government and monetary sphere may lend a hand in making the situation grow even bigger than how things stand at the moment. Reports coming out that hardware shops are running out of safes due to an unexpected high demand means authorities have more to worry about than what they initially thought.

If Japanese citizens begin increasing the rate at which they withdraw deposits from their bank accounts the mechanism that would gear up monetary policy won't be properly maximised leading to less loans being granted meaning a lower growth in credit spent in the economy, the complete opposite of what policymakers intend on promoting.

An even greater dilemma is that monetary notes are very difficult to track making money laundering, fraud and tax evasion rife. If this trend were to continue at the alarming rate it has it would mean government may have a tough time collecting tax, a hard position to be in considering the awfully high levels of debt the Japanese government has gotten itself into to rescue the economy from stagnation.

Weighing up the beneficial value gained when using negative interest rates as oppose to the detrimental impacts that could implode in the economy, it seems the latter is gathering speedily pace amongst financial media commentary being a relatively untested policy measure.

Whether policymakers have the ability to continue selling their belief that executing such actions will definitely cure their respective economies from the ills besieged on them will prove a tough task and would require a steadfast conviction in the agenda they follow that would run the risk of overstating the importance of such measures and ultimately lead to the disastrous consequences being highlighted presently.  

Tucking 10,000-yen bills under the mattress spells worry for Japan's Abe https://t.co/JXcpOWL75e pic.twitter.com/nnmgsWVPYP

— Bloomberg Markets (@markets) February 24, 2016

Gordhan to deliver the toughest budget in post democratic South Africa

South Africa's finance minister Pravin Gordhan will today present the South African budget speech by pathing the way for rating agencies to ease up on their negative sentiment they've had over the condition of the economy that has been wrought with mismanagement by the Zuma administration and subsequently finds itself in despair after years of misuse.

Gordhan, who made a sweeping comeback in late December following the scandalous sacking of Nhlanhla Nene, has made his intentions known since his appointment. As the country braces for what it expects to be a gloomy speech for disposable incomes and profits, the government has no choice but to save face with rating agencies if it wishes to keep its investment grade rating, by raising tax rates and cutting spending in a dramatic fashion.

One glances back to the economic prosperity experienced under the tenure of former President Thabo Mbeki where GDP growth hit 6% per annum, emergence of the new black middle class gave hope to the future and South Africa was seen as a welcoming destination to investors abroad.  One wonders how in eight years this has all come undone?

The mind need not wonder too far to know where the responsibility lies whether or not its fully accept by the person that has led the nation into crisis one scandal after the other. However the focus will sharply turn away from the fumblings of the chuckling president and swiftly concentrate on plans going forward. Hopefully Gordhan has the right charm to convince market participants of the eagerness of government to escape this horrid place currently dissuading investing in and pitch up to the party with a bag of magic tricks. Unfortunately there won't be much magic for South Africans though...

Five charts that show why this budget is so crucial https://t.co/ONgDDrnqpW pic.twitter.com/z19YyyBUW6

— Moneyweb Today (@TodayMoneyweb) February 24, 2016

Travelling Technicals with Global Indices: CAC 40

Today we will be shifting our attention to the CAC 40 which is an index based on the 40 biggest stocks listed on the Euronext Paris Exchange. Europe has become a predominant theme over the years with related news becoming more or less prioritized as the market seeks to find a theme to cling onto. Its certain that although there have been times where the financial steadiness of the continent has sent waves throughout the market the resulting commitment by leaders to resolve the problem has always had a calming effect afterwards.

This would suggest that the issues currently facing Europe isn't one that is short term in nature but rather long term. Issues such as a declining tax base, a shift away by manufacturers to countries where cheaper labour and higher productivity is found, an aging population, over reliance on the social state and much more all contributing to the list of problems mounting up.  

French political thought is currently leaning towards socialist policies that advocate a higher participation by government in the decisions made for its citizens. The nation's tax rates is amongst the highest in the Eurozone with government actively targeting the rich to fund their generous social expenditure to the point that many have been driven away from the country in search of tax refuge causing a mark of weariness regarding fiscal stability. 

However its fair to say that the companies represented in this index have a considerable reputation worldwide but its important to note that although these companies may have been born from French origins their revenues and profits are heavily weighted outside the country giving them a globalised feel about them. Looking through the list one can easily recognize a number of companies that stand out as quality; 

• Danone
• Renault
• Societe Generale 
• Michelin
• Total
• L'Oreal
• Peugeot
• Airbus 

Let us begin with our analysis:

Monthly

I've drawn several trend lines and numbered them according to their priority to my analysis the first being the long downtrend that has been persistently in place since late 2000 which immediately caught my attention as the previous indices we've analysed have seen their highs happen in the years before the Financial Crisis. This chart marks those highs going as far back as the I.T Bubble!!! 

The second lower high happened around the Financial Crisis sending the index back down to it's long term lateral support just under 2500. These levels have been tested 3 times in the last 15 years and have acted as a strong catalyst for bulls to drive prices higher. 

Going onto to trend line number 3 and we see that we are at a critical junction where the price needs to pick up pace or risk breaking the primary uptrend that's been in place since 2012. My concern for this chart is we've seen the highs of the current primary  uptrend reach the secular downtrend and fail dismally, inflicting damage on an important technical level. 

Looking at the Stochastic it appears to have formed a cup and handle pattern that's about to break downwards indicating that the trend in place could be reinforced for a while and we could see further lows tested. The RSI is slowly slipping beneath the 50 mark and upon close inspection if you observe every time this has happened price has suffered from a steep drop. Both these indicators point to weakness in the near term that could be brought on from the turn in tide against stocks residing in the Banking and Financial Sector. 

Weekly

Assessing the condition of the primary uptrend I needed to zoom into the weekly to get a closer look at how things are developing under the surface. The uptrend I had spoken about has been broken which isn't a good sign with the current price testing the underside on the trendline. The cup and handle formation confirms the topping environment that global equity markets are experiencing at the moment and if we were to use this evidence against the backdrop of the secular downtrend in place on the monthly we see the large degree of confluence between the two technical levels. 

We've seen the price bounce back strongly after a series of red candles that broke past the neckline of the cup and handle pattern. This says that the pattern and its target are now in progress and should use any further upside as an opportunity to sell. Price lies underneath the 50 SMA adding further bias to the downside  

That wraps up another week of Travelling Technicals, I hope you were able to learn something new from the chart I provided above and it gives you some insight into the potential storm financial markets could be headed into. If you would like to ask a question you can do so via email at cadetrader@gmail.com I always appreciate feedback and look forward to hearing from you all. Until next time.

Chinese stock market regulator gets a new chairman

In a sweeping move to restore confidence in its stock market top Chinese government officials have taken the decision to remove the chairman of the Chinese Securities Regulatory Commission Xiao Gang after a series of blunders left a gaping hole in investor confidence and the financial market community shaken by the assault of uncertainty brought on by fear that the overinflated valuations in Chinese equities may burst at anytime.

Gang had been tasked with liberalising Chinese equity markets so as to integrate the nation's financial systems with that of global standards in an effort to attract foreign investment to its shores. However the former deputy Governor of the PBOC played his hands to fast and loosened the grip on leverage allowance effectively spurring on valuations to treble over a period of less than a year. The sped up process led to concerns from asset managers that mass distortions were beginning to present themselves and government needed to intervene to prevent any further damage that could descend down on financial markets.

These warnings were merely brushed aside with the regulator going as far as to arrest any individual caught sowing seeds of doubts amongst the droves of newly inducted investors riding high from the risky speculative game playing itself out.

True to their word chaos covered the market quickly with frantic daily moves that would make any trader sick. The CSRC responded by trying to coax the market out of believing there was any concerns contributing to the often fluctuating and dangerous nature the stock market had turned into saying that it was a momentary pause in trend after an impressive rally that would continue driving higher once uncertainty had blown over. It didn't...

As volatility gathered momentum the contagion spread to the entire global financial system which at one point got so bad a team assembled by the regulatory authorities were assigned the task of artificially pump the market by buying up large tranches of stock towards the end of the day with market participants picking up on this trend very quickly. Initially exacerbating the problem the market eventually settled down but fear remained.

The icing on the cake must've been the implementation of circuit breakers intended to halt trading when volatility got out of hand. The date set down for the start of their functions was the New Year but it wasn't four days in that the system was already creating haywire with markets entering back into the chaotic scene it found itself four months prior. A decision was made to scrap the system before it caused anymore harm which marked a big dent of confidence in the regulators ability to maintain instability.  

New boss at China's CSRC has 99 million local investors to win over (plus some global ones) https://t.co/QbgZUij3Ef pic.twitter.com/YZHK9frihK

— Sarah McDonald (@mcdonaldsarahj) February 22, 2016

Replacing Gang as the chairman is Liu Shiyu who joins the organisation after having served previous stints in the same role at the Agricultural Bank of China but most notably his work in developing the bond market in China has been recognized by market participants as an added boost to his employment as the head of the CSRC.

Shiyu takes over the role at a pressing time for Chinese equity markets which will be testing to the new regulator head with the height of global volatility being seen to have generated from the rudimentary attempt to align equities in China with the rest of the world that has subsequently caused ructions throughout financial markets.

Judging the last eight months of price action in Chinese securities would task Shiyu with a tough job of trying to restore confidence in a system that has failed to live up to its expectations policymakers had paraded about by cutting deep into the pockets of unbeknown investors of which the majority is made up of middle class Chinese citizens.

Market stability forms an important foundation in drawing confidence to a system that requires copious amounts of trust in terms of transparency, marketability and functionality. The balance that needs to be struck is to allow the forces of market buyers and sellers to find a state of equilibrium and at the same time reassure the rest of the world that current valuations are correct, a hard proposition to sell.

Towards the start of 2015 Chinese equities were valued at around $10 trillion but today find themselves hovering just above $5 trillion representing roughly half of what it stood at a year ago with some analysts going as far as to say that equities remain overvalued and could still come in for a hard blow in months to come.

Whether this comes to fruition is the least of Shiyu worries as he needs to adequately cement down rules that set down a long term basis from which to work from that not only promotes confidence but also doesn't hinder the function of the market. Participants lack of certainty around the CSRC seems more likely to cause problems than actual market themes so the need to get it right is placed on the highest priority.

But more importantly, the way Chinese equities are viewed from a global perspective will probably be the toughest task that needs to be accomplished. The sheer population of China catapults their economy to amongst the top ranking in the world if managed properly however the completion to a fully fledged economic powerhouse requires that financial systems are properly set up to benefit from the large flows in and out of that nation due to the size of the economy. China is yet to convince its developed counterparts of such transition with the latest blunders confirming this.

It'll be interesting to see how markets respond over time to the measures Shiyu puts in place but it is certain that he will be watched carefully to any missteps he makes. Let's hope that maybe this time we have the right man for the job.      

How the minor oil players are reacting to the slump in price

OPEC's freeze on production may not bring the desired price surge many producers were looking for but it does signal a shift in sentiment away from expansionary production which does provide somewhat of a relief for many producers. However the bigger players have only taken decisive action when their own economical state has been threatened with cries of help from smaller players falling on deaf ears.

What response have these small producer taken to shield their economies from the damaging blow?

Norway

The Scandinavian nation is the largest producer of crude oil in Western Europe and has resorted to drawing funds from its $810 billion sovereign wealth fund to soften the blow from the loss of revenue in government's budget. Although a fund with that amount of money would take some time to drain off , the point is the state is unable to rely on the revenues produced from oil to fund its policies which is problematic.

Analysts suggest that a figure as high as $10 billion might be needed to be drawn to inject cash flow into government coffers but this figure wouldn't put too much of a dent in the overall figure as the fund could raise this from the dividends and income it receives annually.  

Furthermore the trend of aging and stagnating economies within the Scandinavian region places Norway at risk that the grips of this epidemic may worsen the crisis and lead the government to become excessively reliant on these savings to abate fears of its reign throughout the economy.

#Norway Central Bank Chief Warns on #Oil #SWF as Coffers Raided https://t.co/QMmMywegVt via @SalehaMohsin #OPEC pic.twitter.com/qIi6gtUoY6

— Javier Blas (@JavierBlas2) February 19, 2016

Nigeria

It was always known that Nigeria's cost of production in terms of oil stood at the higher end of the cost curve so any declines in the price of oil would yield pleas of reduction in output but being an insignificant player these calls for help have never penetrated the soul of OPEC as much as the likes of the Middle Eastern nation members would.

However no one would've thought the drop in oil prices would descend at such a rapid pace causing calamity around every corner with the weakest receiving the biggest blows. Nigeria was no exception to this and with the transcendency of a new government, threats from Boko Haram and ascending to the position of Africa's largest economy there were a lot of eyes watching closely to how new president Muhammadu Buhari would juggle these priorities.

A nation who heavily relies on oil for revenues, Buhari couldn't stand by and watch the depletion of foreign reserves at an alarming rate slipping away fast which pressure him to impose currency controls to stop the rout. Problem being this has made the situation even worse than it was to start off with.

Foreign businesses are struggling to expatriate profits to their home countries potentially damaging the reputational on investor confidence that had gradually lifted capital inflows. The resultant outcome is the emergence of a black market for dollars that continues to skew the price by diverging further apart from the official rate set by the Nigerian Central Bank.

Buhari's long term strategy of making the nation less reliant on oil isn't winning over many critics of his policies and one wonders how much longer will ordinary Nigerian be willing to tolerate an ailing economy coupled with perceived empty promises before a breaking point can be reached.

 

#Nigeria faces double whammy as Buhari fails to manage oil rout https://t.co/JmVqnuB31N

— Bloomberg Africa (@BBGAfrica) February 18, 2016

Venezuela

Hyperinflation isn't something new to Venezuela whose had its fair share of political instability in its history marred with economic mismanagement that's left scars. The current sketch of things in the oil rich nation is a troubled one where government is no longer able to provide its citizens with fuel subsidies that boast the cheapest gasoline in the world.

President Nicolas Maduro made sweeping changes that saw its currency being reset at a much lower devalued rate and a hike on gasoline prices, the first price increase in almost 20 years.

Much the same as its counterparts in Nigeria the country relies on oil revenue to feed its economy, a situation that hasn't played out very well. Due to the drop Venezuelans have seen prices of imported goods, items classified as essentials like foods and medicines, skyrocket as shortages plunge quantities in stock.

Suggestions that such dramatic measures would stir disruptions and create unrest amongst citizens is far off from what we could see, these are frequent occurrences.

#Venezuela Lifts #Gasoline Price by 6,200% and Devalues Its Currency https://t.co/R4xHxDXF6T @business #OPEC pic.twitter.com/grSdDNBe47

— Javier Blas (@JavierBlas2) February 18, 2016

Central bankers dabbling in equity markets spell a dangerous trend

The new buzzword on the street these days is NIRP, shortened for negative interest rate policy which details the kind of monetary policy the world is seeing emerge from developed nations in response to deflationary risks and lack of any demand stemming from their economies. Japan was the latest nation to add to the growing list of countries resorting to these untested yet drastic measures in the hope that it will accelerate the growth needed to avoid perpetual economic stagnation.

However it was with much trepidation when it was learnt that the Bank of Japan now owns over half of the equity ETFs listed in Japan. This would be a departure away from the conventional process of using instruments such as bonds, physical gold and hard currencies as means to control the monetary supply. But this experimental method has left many academics concerned that this may be sending out the wrong message about the true state of financial markets worldwide.

Further investigation would reveal that the BOJ isn't the only central banker engaging in these reckless and manipulative actions which could cause a grand crisis that would overshadow the worst of our times. This story from August 2015 states that the Swiss National Bank had increased its holding in Apple Inc. by 5.5% from 8.9 million shares to 9.4 million and is amongst the largest shareholders of the company.

If I recall correctly, wasn't the job of central bankers to ensure the stability of the monetary system by implementing various policy measures and tools to aid it in reaching its objective?

The SNB holds such a significant stake in the technology company, although not as large as some investment institutions, it would give them a considerable amount of voting power that could be used to elect management or steer the direction of the company, but we talking about a central banker, not an institutional investor making a decision based on properly researched information whose job is to make the right call for clients.

It seems as if Apple Inc. isn't the only holding by the SNB as the article states that its investment in US equities at the time (5th August 2015) which happened to be right before uncertainty exploded on global markets, stood at $38.6 billion split among 2500 companies...for diversification stake. Who would've thought that central bankers would feel propelled to open shop in the field of investment management.

"Swiss National Bank grows stake in Apple by 500,000 shares in June quarter" https://t.co/gTBAdqY0h2

— StockCats (@StockCats) February 18, 2016

One begins to wonder how much confidence is being lost in these imposed monetary bodies whose mandate is to create price stability and reduce the harmful effects resulting from fluctuations of inflows and outflows of money into the economy. It does beckon the question if this is why we've seen a sudden surge in buyers of gold over the past few weeks.

In times of uncertainty, the yellow metal is often used as a place of safety but over the past three years we've seen a dislike for the commodity as interest rates were kept artificially low and policymakers singing the tune of prosperity for the future. Fast forward a few years later and the grand scheme which central bankers thought would've proven effective is now deemed a failure and resulted in policymakers digging deeper into the hole they've created.

Investors jump from equities to gold this year signalled a declining confidence in central bankers to contain the sorry state of affairs currently being felt worldwide. I've said it a number of times that continuously printing money and pumping it into the system is merely a short term solution to a long term problem. Government's need to tackle the structural problems confronting their nations, not central bankers.

By participating in equity market central bankers are merely fanning the overvalued nature of the market thus illusively leading participants to believe that all is well and far from the worries that may keep them up at night. The problem with this train of thought is reality often hits home and the bubble of illusion bursts with an enormous splat against the wall of confidence built up over the period, all but defeating the trust in these institutions.

When will the market reflect the true nature of what's happening on the ground?  

#Gold Veteran sees loss of faith in Central Banks as prices soar. https://t.co/WaVT6TslSo pic.twitter.com/WVBC7ItCKm

— Holger Zschaepitz (@Schuldensuehner) February 18, 2016

Saudi Arabia deals it's hand as oil slump cannot be maintained

The first concessions by major oil producers has been made following a two year price battle between US shale gas producers and oil body OPEC where an abundant supply of the energy commodity was made available driving down the price of oil to a 13 year low.

A recent announcement made by Saudi Arabia and Russia to freeze the output of oil production to January levels marks a significant turning point for the commodity however the agreement by the top world producers comes attached with conditions that other members co-operate with the scale back. Saudi has rebuffed a number of proposals made by Venezuela and other members of OPEC for cuts in production since as early as last year but found the opportunity to bring Russia into the fold all to crucial to reignite its ambitions to continue dominating the world oil supply through OPEC.

Embed from Getty Images

Russia's deal with China to supply oil to the ever growing economy dealt a bitter blow for the oil body who had been hopeful of securing a lucrative agreement that would grant it access to gigantic demand with plentiful quantities needed to drive forward the progression of a new economy buzzing with millions of potential consumers.   

Although both parties sit on the opposite spectrum of the support lines involving the Syrian civil war, the need to replenish government coffers has taken an unprecedented priority as the funding needed to continue that support evaporating at an alarming rate and with much at stake in that region it doesn't seem likely that anyone wants to walk away not having secured a good deal. A clear case of keeping your friends close but your enemies closer. 

But the deal proves to be mutually beneficial to both nations as Russia finds itself in a spot of trouble following sanctions being imposed on it due to the annexation of Crimea which has crippled the nation's growth rate pressing President Vladimir Putin to tone down his provocative talk. The former communist state understands the importance of a steady growing economy if it is to compete in trade terms with the likes of its neighbours, the EU. 

A problematic issue that will present itself is that of Iran who had its own sanctions lifted and now in the processing of catching up after years lost. The oil rich nation has said explicitly that it will not cut back production and plans on expanding output to around 4 million barrels per day. The nation was responsible for OPEC effectively scrapping output targets at its recent meeting in December 2015 where no solid decision could be made. 

If Iran were to expand production by 1 million barrels it would simply negate any positive impact made by smaller producers and deem the program useless. However it could also damage the reputational image of the organisation by allowing larger output nations to not co-operate but making the smaller ones comply. It would open up the door for "cheating" to occur in the future as smaller players wouldn't find the need to cooperate in their direct interest if OPEC was willing to overlook discretionary situations whilst ignoring the cries of others.

Embed from Getty Images

Case in point was when Venezuela and Nigeria both pleaded with the oil body to bring forward the scheduled meeting last year as their respective economies were on the brink of collapse. Their calls were ignored yet as the momentum gains ground with the present situation we see that the urgency to put a plan of action in place is not based on eliminating the ill effects of those economies but rather that of Russia and Saudi Arabia. Self centred decision making has never won any friendships nor will it defend the actions of the organisation. 

More still needs to be done to curb supply and a freeze in production won't aid that if demand carries on taping off but it does signal a shift in trend away from producing and focusing on reducing production steadily so to allow the price to return to a point where the industry may begin to profit once again. I don't envision seeing a dramatic surge in price this year with a possible a modest increase happening depending on the depth of reductions made. We've hit a bump in the road with Iran and nothing stops a further bump to occur. 

Travelling Technicals with Global Indices: Dow Jones Global Titans 50

With the global steadiness of the world economy called into question over the past few weeks it would be fitting to assess the reaction multinational corporations have had to the latest developments that unfolded themselves. In an age where the interconnectedness of nations has formed the mantle piece of globalisation that has yet to be tested, the current situation temper critics reasoning why the implementation of closer relations amongst countries do produce risks that shouldn't be ignored.

So today I will be focusing on the Dow Jones Global Titans 50 Index, a market index that tracks 50 of the world's largest blue chip companies. The companies have a large portfolio of assets that earn profits in their home countries and abroad, helping us to identify global trends easier than what it would be had we only studied each individual stock in isolation.

One of the major themes last year was the strengthening dollar that wrecked havoc with corporations profits abroad when poised to repatriated them causing them to lose a significant portion of the profit due to currency fluctuations.

It seems as if this trend may continue into the future with the embarkment of negative interest rate policies from fellow developed economies but a progressively hawkish US policy. This divergence will drive the dollar further however the momentum that was built on from the expectation of the Fed raising rates has lost steam with Fed chair Janet Yellen signalling that central bank might be pushed into easing back on their expected hiking intervals.

The Top 10 Components of the Dow Jones Global Titans 50:

1. Apple Inc.
2. Microsoft Corp.
3. ExxonMobil Corp.
4. Johnson & Johnson 
5. General Electric Co
6. Facebook Inc. A
7. Berkshire & Hathway B
8. Nestle SA Reg
9. Amazon.com Inc.
10. Procter & Gamble 

Found on S&P Dow Jones Indices McGraw Hill Financials 

It is evident from the list above that US companies dominate the index which isn't surprising however it's the global brand that makes them stand out from the rest (the exclusion of Berkshire & Hathway). Most of the products sold are consumer goods that have recognisable brands that are easily distinguished in countries throughout the world. 

The importance here is that these corporations with this type competitive advantage should generally see a strong correlation with global economic activity which provides a gauge to measure the condition of the world economy. 

Monthly

Probably the only distinct technical pattern that I see is the long term uptrend that recently broke down. Before that the index had gone grinded along resistance provided for by previous highs but lacked the impetus to go further. Price action remained muted until the second half of last year when it made a dive downwards through the upward support confirming the break of the trend. 

From there we've seen rather large ranged candles indicating an uptick in volatility. The price has also touched the 50 SMA a number of times and subsequently bounced but as things stand at present the price lies underneath that mark. Although we still have half the month to go it would be important to watch things closely. 

On the RSI I've highlighted how the indicator briefly tipped below 50 only to surge upwards again but finds itself in a compromising position. This would suggest a weakness in upward momentum and if lateral support were to break down we could see a down move materialise quickly. 

Weekly

Scaling in closer to the weekly and we're able to pinpoint better where the problematic technical areas may be. A basic head and shoulder formation has formed with the price having tested the neckline but able to hold its ground and find itself on the right side of things for the buyers. The price is below both 50 and 200 SMA which gives the sellers the edge up. 

Once again I'm concentrating on the RSI with two rectangular boxes labelled 1 and 2 respectively. The first box shows how the steady uptrend was able to hold onto the all important 50 mark and retested that figure a number of times during the process, but we see in the second box how momentum hasn't been able to find a strong position to work off and continues to slip around. This would explain the choppy action that's been experience and possibly a clue to what we may still see. 

Both moving averages don't have a prominent direction although the 50 SMA is leaning downwards it's not enough to draw a line in the sand. 

That concludes another edition of Travelling Technicals, I hope you've enjoyed it and don't forget to send me your feedback, it's gladly appreciated. If you would like to contact me you can do so by email cadetrader@gmail.com, until next week. 

Japan adding further woes to the global economic outlook

Japan's economy delivered another blow to policymakers who are beginning to feel hopeless after exhausting every means possible to stimulate the economy that has yet to return the desired prosperity that was intended to free Japanese citizens from the black hole of economic stagnation.

Under the leadership of Prime Minister Shinzo Abe, the government of Japan laid out a bold strategy that would reverse the adverse impacts of years of deflation and economic contraction by employing what it called "The Three Arrows" namely a extremely accommodative monetary program and stimulus measures, an expansive government spending spree as well as economic reforms aimed at parts of the economy that were seen to be drag on progression forward.

Three years later and questions are mounting up as to the success of the policy agenda that has failed to light up any ray of hope so far with many speculating that not enough emphasis is being placed on reforms needed to break away from established convention that has held back the Asian nation for many decades and resulted in a slip from second to third largest economy in the world.

Shares surge in Japan on speculation of further stimulus, after economy contracts https://t.co/Er0E2GVrtB pic.twitter.com/Hy4ZH8gB8z

— Bloomberg Business (@business) February 15, 2016

Dismal GDP numbers means that policymakers will need to continue to mission on with its agenda with lack of any support from economic data that indicates failure on their part but not without dire consequences of their own. The increase in government spending has resulted in an inflated government debt to GDP ratio that's made most rating agencies wary that such masses of debt can be reduced at a brisk pace that would satisfy investors of the government's ability to service that would be free of obscuration from the overburdened nature of existing debt.

However the number drove up Japan's benchmark index the Nikkei 225 over 7% as speculators saw an increasingly likelihood that more stimulus would come to market from the Bank of Japan who recently lowered interest rates to below zero for the first time ever in an effort to power things forward.

Although a positive for the stock market, some would feel puzzled by the the rather large daily movements in the index given that the rest of the world would respond in a much similar way but spread out over a number of trading days. It would suggest that there may be some disconnect between the Japanese equities market and the rest of the world which is very much the case.  

#Japan's Nikkei ends UP 7.2% at 16022.58, biggest percentage gain since Sep despite soft GDP numbers. pic.twitter.com/7G11QHC5DT

— Holger Zschaepitz (@Schuldensuehner) February 15, 2016

 The BOJ decided to included equity ETFs into its basket of assets that it buys up when it wishes to stimulate the market. This decision was taken to entice those with hordes of cash to place it in better use where the returns would be higher than that earning in a bank account where very little interest is offered. The returns generated would have a knock-on effect on spending thus broadening expenditure which would further boost the size of the economy.

But this has not materialised as should have been the case and now the BOJ sits in an onerous positions of having accumulated over half of Japan's listed ETFs placing great risks on the financial system in Japan and possibly the entire world.  Over inflating stock valuations puts pressure on companies to bear greater returns than what they are at present however the situation brings about skepticism in judging the current global economic outlook coupled with a struggling policy agenda in Japan, one does begin to feel worrisome that something bad might be brewing.

I think the perfect phrase that best describes the situation is "leading the lamb to slaughter" in the sense that the falseness being injected into Japanese equity markets does not match up to the reality on the ground and although policymakers may be able to hold out for now there will come a time when the chickens come home to roost...      

Owning Half of Japan's ETF Market Might Not Be Enough for Kuroda https://t.co/SK9oXW5EM7

— StockCats (@StockCats) February 15, 2016

Turbulence rocks the market as banks present uncertainty

What a week's its been in financial markets after being rattled by fears that debt contagion may be seeping through the global banking system and decreasing financial institutions ability to service debts. Some of the world's biggest banking outfits have been slaughtered with Deutsche Bank, Credit Suisse and JPMorgan amongst some of the few feeling the pain from a shift in sentiment.

There are a number of issues that seem to be pulling stronger against shareholders becoming too confident about the long term future outlook of the banking industry who took a dent to their inflated ego's not so long ago when the Financial Crisis dawned upon the world and spawned financial destruction to every corner of the globe. At the time bankers fielded the blame for over exerting their liberal ability to create debt for which they passed on to consumers at an alarming rate not fully quantifying the negative impact it might stir within the system should a crisis unfold.

Eight years down the line the global financial system has yet to fully recover even after a buoyant effort from central bankers feeding the monetary system with trillions of dollars to halt the rot from setting in. However it is this exact action that has aided the disruption ploughing its way through markets as we speak and the madness has yet to stop with the latest move being that of introducing negative interest rates without testing their ability to withstand headwinds and finding momentum in tailwinds.

For banks, especially those in developed economies, the rate of interest has been kept artificially low hampering the earnings of these financial institutions as the rate at which they lent out couldn't be much higher than the rate the central bank would borrow to them as they stood to lose significant business to competitors not taking into account the dire financial situation being experienced by the average person in those countries.

This resulted in an inflationary impact on the balance sheet as more loans were needed to satisfy the profit demands of shareholders who would sell off at a whisper of despair being heard but the return on assets being driven down by the dismal spread that could be made from low rates.

Investors flee banks that show sign of weakness, with Credit Suisse at 27-year low https://t.co/cYCb4pKxEM pic.twitter.com/qZfi42GWVr

— Bloomberg Business (@business) February 12, 2016

The suppression of earnings made these banks seek out riskier assets, one of those being the birth of a new industry in the field of energy; shale gas producers in the US whose implicit goal was to loosen the grip on the economy's overreliance on imports of the much needed fuel powering the economy. They didn't bank on (excuse the pun) OPEC responding to such challenge by opening up their own production capacities and flooding the market with surplus oil.

Consumers may be excited by the prospects of lower energy costs but the consequential effect from a oil price war has not only unhinged the stability in the oil industry, it's plunged the profitability deep into the abyss. You'd agree with me when I say that the profitability of a business being funded by a bank has a direct influence on a bank's ability to turn a profit. What does this mean for banks?

Quite simply the overburdened balance sheet they've been dealing with is now at risk of being trimmed back if we start to see a failure of US shale producers , a cost which will ultimately be borne by shareholders who face reduced profits. But the outlook is made bleak by the fact that the profits which are expected to cover these losses should they arise are insufficient due to the low margins offered by the returns on loans.

Further compounding the problem is the emergence of a trend whereby central bankers are resorting to negative interest rates in an attempt to veil their fraught efforts at stimulating their economy. This will have a devastating impact on banks who aren't earning enough to keep investors interested. Who can blame investors for selling off banks they way they've done this week with such turbulent news that would send shivers down anyone's spine let alone the prospects of incurring huge losses in the processes.

The new normal in mining industry; scrapping progressive dividends.

A continuation of a trend that had emerged late last year when mining giant Glencore responded in earnest to shareholders fallout with the company's stock price has fully embedded itself into the mining industry with the latest announcement out of Rio Tinto that it would be scrapping its progressive dividend policy.

This after fellow competitors Vale SA and Anglo American followed in the shadows of Glencore who had taken a hard wrap over the knuckles when it was suggested that the disturbing price decline of commodities within the sector was increasing the inability of the mining producer from servicing the debt holding it had taken onboard while planning an extensive expansion programs.

It would seem the spotlight is now squarely on BHP Billiton who has yet to make a decision over whether it will take the same action to well up cash reserves that are facing a constant bombardment from loss making production. The move by Rio Tinto all but confirms that Billiton will act decisively if it wishes to stay in good favour with its shareholders, a fate which was tested when it had its ratings downgraded by S&P.

Rio Tinto plans new cuts and scraps progressive dividend policy after profit slumps 51% https://t.co/HnaOHvgrnZ https://t.co/NdT6LsmWDR

— Bloomberg Business (@business) February 11, 2016

Chronicling the demise of the mining industry spans back to moment when China began its economic descendent from lofty economic growth numbers that ably prevented the world from disintegration after the Financial Crisis took hold of a bleak outlook. As with all good things, they come to an end and so did the demand for basic materials needed to form the backbone of an economy.

However far from the realism that stood firmly in place, mining companies proceeded with their ambitious expansionary plans in various commodities that they believed would be supplied with good demand once production came to market which obviously wasn't the case as things have panned out. It's this belief that caused the start of many ill fated moments that's presented themselves over the past 5 years in the mining space.

First to take a cut was the planned projects in the pipelines that didn't have such tremendous impact of shareholder valuation besides for the fact that the talked up earnings potential once flaunted weren't expected to be made which did leave a bit of disappointment. Following on from that was the capital expenditure with some projects that had already been started halted in the process as companies were beginning to feel skittish about the outlook.

Fast forward to analyst's worrisome assessment of Glencore and the need to cut further cash leakages on the balance sheet and we had come full circle with the resultant outcome being an gluttonous commodities market unable to find sufficient demand to meet current production output. The fact that we have reached such extreme of the spectrum eludes to the most poignant argument against those in favour of capitalism; Greed.

When it becomes part and parcel of the thought process the boundaries for which negative extremities could potentially impact know no limits.

How far away are we from a bottom?

No one knows but the fact that investors have had to curtail the one income stream it had relied on to steady their hands from shipping out capital elsewhere does suggest that the industry could face a bleak future in years to come in trying to convince once again of the investment opportunity.  

$1.4 trillion lost and it might get even worse for the mining industry https://t.co/HnJNIFMf3m pic.twitter.com/m7jcOCoirZ

— Thomas Biesheuvel (@tbiesheuvel) February 11, 2016

Travelling Technicals with Global Indices: Shanghai Composite Index

It's unbelievable to think that we've entered the 6th week of 2016 already and what a busy one its proven to be so far. Following on from last week's analysis of the CSI 300 index of China, today we'll be having a closer look at the more watched Shanghai Composite Index that has stolen much of the attention away from its counterparts during the latest Chinese financial market meltdown.

In the analysis I presented in the previous blog I had said that there were a number of issues that seemingly weighed down positive sentiment in China and one of those being the lack of the appropriate policy to prevent a hard landing. I also stated that the transitory nature of government's policy in relation to transforming the economy from purely manufacturing to a consumer driven one was hurting the future outlook. 

There's no need for me to go into further detail but if you missed out on last week's blog you can catch up with what I had to say by following the link. 

Travelling Technicals 2 February 2016 

Monthly

Although the index has been in function much longer than its newer counterpart, the CSI 300, we do see similarities in that the price exhibits stages where it suddenly spikes higher into new territory and subsequently collapses.  I've drawn a dome figure over the previous spike to show this and if you look carefully you'll see the same thing has occurred with the latest spike however we have yet to see the full resolution to the downside which we could assume is halfway through progression. 

It's difficult to identify any distinguishable trend after such spikes and given that China has only started the process of liberalising their financial markets, not without a few hiccups along the way, it suggests that more progress is needed in terms of transparency Chinese regulators offer market participants. If the situation remains as it is now there is a risk that the same outcome takes place as had done with the previous spike. 

Drawing closer to the present we see that a neatly formed inverted cup and handle formation has evolved which seems to be the only clear technical pattern that has formed over the time series. These pattern occur when put through various bouts of volatility. Again the suggestion here is an increased level of interest is being focused on the index highlighting its ascendency. 

The difference we see in this chart compared to that of the CSI 300 is although both show the same pattern namely the inverted cup and handle, the Shanghai Composite demonstrates a cleaner break of support to confirm the patterns validity. The target would be the lows last seen in 2009, a level that's concurrent with the CSI 300. 

Weekly

Zooming into the weekly we see a clearer picture with two identical technical patterns formed but with different scales of declines speculated. We recognize the inverted cup and handle formation we saw on the monthly however this can be broken up into two segments with one representing a minor and the larger one the prominent formation. 

Support that gave way on the minor sat at 3600 however take note how the price fell below the 50 SMA and failed to secure it once the dropped occurred. The support on 3600 then became resistance as the price struggled to take control of those levels again forming the underlying basis from where the bears could take full control. 

Once enough time had passed and the energy needed to break higher having dissipated it was the bears turn to inflict major damage where it mattered most which is evident by the long ranged red candles that resulted in the level of 3000 being broken decisively. The confluential impact of the 200 SMA and the neckline of the major cup and handle provided weak support for the buyers and we witnessed the price sliding easily through the cracks. 

With price now sitting below both key moving averages sentiment has turned the tide with the level of 2500 representing the completion of the minor. The biggest concern at the moment is the fact that the major has just broken past support recently so the move is yet to reach it's full potential which sits at 1750. 

The alignment from both indices as to the amount of decline is still expected to come from the Chinese stock market does add further evidence that the worst may yet to be over. The situation may be glazed over for the time being as the market contemplates the impact of negative interest rates but will accelerate into the forefront again when things get out of hand. 

Will Social Media dominate the M&A deals this year?

There's been a fair amount of coverage of social media companies recently after a number of the big players reported quarterly number updates to market with the odd management shake up to add some flavour to the mix. It would seem as if 2016 will be a big year for these companies as a divergence between the good and bad is starting to emerge that could lead to some interesting developments in the months to come.

We've seen the likes of Facebook charm the market by presenting upbeat results coupled with an optimistic yet feasible plan to flex its muscles and remain the dominate force in social media with fresh ideas on the way it sees itself influencing the shape of the industry over the next 5 years.

On the counter the likes of Yahoo's Tumblr, Twitter and LinkedIn's respective management teams have really had a tough time getting to grips with market expectations after failing to deliver the desired results needed to attract attention that would distinguish their business from other competitors.

Focusing on LinkedIn's earnings update yesterday that sent the company's stock price plummeting 45% , one does get the sense that the creed on the Street at present is shape up or shift out. Management forecasted earnings and revenues for the year 2016 came in far below what the market was expecting pointing to a weaker economy, currency fluctuations and the shutdown of Lead Accelerator all acting as a drag on the outlook of the company.

The kind of treatment received by LinkedIn's stock price shows that Wall Street allows no margin for error when it comes to delivering earnings and no discrimination when it comes to a selloff with the likes of this particular company once being a much loved favourite amongst stock pickers.

LinkedIn shares drop 43% as weak forecast spooks investors https://t.co/wXPsxqLqKy {no longer the blue eyed network in investors eyes}

— Michael de Groot (@stayingaliveuk) February 6, 2016

Also making waves within the social media sector is reports indicating that Twitter will be changing the way users see tweets in their timelines from the current reverse chronological order to a new format whereby algorithms pick the tweets it thinks people most want to see. The suggested move has ironically created outrage on social media with many calling this the end of Twitter.

This isn't the first major change that's been implemented since Jack Dorsey took over as CEO last year October that has so far been met with outcry from avid users of the social media outlet. There is also a proposed change to the limitation of 140 characters per tweet which may be extended to 10 000 characters.

But as the restructuring of these businesses take centre stage to how the market responds , the drop in valuations open up the possibilities to potential merger and acquisitions within the space. Rumours have been abound that Rupert Murdoch's News Corp has been flirting with the idea of buying a significant stake in Twitter as it seeks to diversify the form of entertainment it provides.

Considering the amount of new social media companies that have popped up over the past decade following the early success of Facebook, one could be tempted to think that perhaps the oversaturated market currently being experienced may be a turning point where the battle over the little scraps leftover after the bigger players have taken their share of revenue may start to be getting thinly spread amongst the many fighting for revenue.

I think the way in which these companies generate revenue has become so much more complex than the original streams that fanned the market's desire to see these enterprises become sustainable over the long term and survival will depend on who is able to come up with inventive ways of renewing the way revenue can be raised. If these companies succeed in this respect they half way done in forming a business worth investing in.

With the likes of companies such as Twitter, I think as much as the market may have put them on the back foot by drastically devaluing their business model, they also have provided them a lifeline by opening the synergistic advantages to their bigger competitors who may see value lessening the number of firms within the industry but in the same breathe using a combined edge to maximize profitability by branching into sub categories of the social media sphere effectively diversifying the business.  

I bet an algorithmic timeline will think we want to see more advertising #RIPTwitter
https://t.co/ggIK1FVssO via @kantrowitz @buzzfeednews

— Kat Meringue (@Izianikapani) February 6, 2016

US Dollar Index plunges as fears grow on policy indecision

Probably the biggest news story at the moment has to be the sudden drop off in the US Dollar against other major currencies following market expectations that a rate hike is looking less than likely to happen this year. This after the Bank of Japan added to a growing list of central bankers who have opted to drop the level of interest rates below zero opening up Pandora's Box to unknown outcomes never experienced before that could have profound effects in years to come.

With the uniformity of world economies out of sync the Fed is facing a difficult task of trying to convince the market that lifting rates in the current economic climate is the right strategy to follow. As more evidence is pointing to a fragile world economy markets seemingly weigh down sentiment that paints a worrying picture for the future.

The US Dollar Index which measures the US Dollar relative to 6 other major currencies and is the most widely followed currency index suffered its worst 2 day drop in 7 years. That would take us back to the height of the Financial Crisis when armageddon ruled fear and everything seemed to be piling up into a heap of catastrophe in financial markets.

However the most striking difference between those times and the current outlook is that we are at the lower bound of the interest rate cycle and much of what was thought to have happened has failed to materialise as it the case with the ECB and BOJ who have both deserted the normalisation process and dropped their interest rates into the abyss.

Added to the fact that the world is facing an oil glut that has suppressed prices to lows last seen over a decade ago, there doesn't seem to be much similarity between this time and 2008.  

Herein lies the problem; if other central bankers such as the ECB and BOJ who have artificially fuelled their economies with copious amounts of "free money" did so by following the same action as the Fed had been executing and now face the risk of a stalling economy, what are the risks that the US economy faces the same problematic issue?

US Dollar Posts Biggest 2-Day Drop in 7 Years as 2016 Rally Erased https://t.co/hVvzyrok4O via @business pic.twitter.com/LBG9NPmHNL

— Dan Popescu (@PopescuCo) February 4, 2016

But although the drop triggered off a number fanfare in search of the relative depth of the move, the sarcasm wasn't too far away to shout down the chorus of concerns by dollar bears hoping to break the momentous rally the bulls have been able to pull off over the past year. In all truth the relevance of a 2 day decline is miniscule when considering the overall run its had.

Observing the chart there does remain a risk of the Dollar Index falling lower here if you were to look at the longer term view with the price grinding up against the 100 resistance. If market sentiment is right and we don't see the Fed act in 2016 the risk of a reversal in the decision to hike rates would become a possibility and the Fed could even follow suit of other developed economies by dropping rates below zero.

If that scenario were to play itself through this year we could very well see a big pullback in Dollar strength that would destroy all hopes of the normalisation process taking place. That would certainly be a big credibility killer if the Fed were to make that decision.  

ANALYSIS: Brutal, historic plunge in the US Dollar index, just in the past 45 years. pic.twitter.com/NCzMaCsTTZ

— Rudolf E. Havenstein (@RudyHavenstein) February 3, 2016

The dollar plunges as expectations on Fed to hike this year dims

When the Fed craftily snuck in an interest rate hike late last year when Christmas cheer had taken over, not many had taken the time to study what had been said during the press conference after the decision was made and only once the holiday spirit was gone and markets had gotten back into full swing did everyone realise the true implications. It was if the Fed was suffocating the global financial system with its necessary hike at a time where uncertainty surrounding China had yet faded too far from the thoughts of concern.

FOMC members had signalled that it was their belief that the US economy was strong enough to sustain four interest rate hikes in 2016 which seemed a little over ambitious at the time. The US has been growing steadily since the Fed took the decision to pump billions of dollars into the economy to advert a catastrophe but the jury is still out over whether it succeeded in reviving the system or made the situation worse.

Things however have shaped up much differently to what the Fed thought they would be and the short amount of time in which the change occurred highlights the fragility of the global economy. We heard last week how the Bank of Japan had decided to drop interest rates below zero for the first time in its history, a situation that's become familiar with those living in the Eurozone who initiated the same strategy late last year in response to lack of demand and looming deflation.

ECB president Mario Draghi said at a forum in Davos last month that he foresaw the central bank accommodating the economic zone for longer period than expected and if the necessity arouse, further drops into negative territory for interest rates.  

Waning expectations: When will the Fed hike again? via @FerroTV pic.twitter.com/IByvNe70o0

— Pedro da Costa (@pdacosta) February 3, 2016

Because the US falls into the same category as these economies, its fair to assume that the pathway sketched out by a member of this group often marks a trend that is likely to materialise in the economies of other members at some time in the future giving policymakers sufficient warning of the risk that may lie ahead.

Considering the heightened volatile climate that has been created by China, the two examples explained above only serve to exacerbate proceedings with much of the weight resting on US shoulders to carry things forward. Knowing fully well that this is not an easy task given the unparalleled nature of world economies at present , the Fed will have no choice but to suspend hiking rates for the time being as its eagerness to see the interest rate normalisation process being accomplished looking less likely.

Rumours have begun to swirl amongst participants after it was reported that the Fed had asked banks in a survey, the impact negative interest rates may have on their business should that outcome happen. If this doesn't signal a willingness of the Fed to embark on such policy measures to abate further economic weakness then I don't know what does.

#Dollar takes biggest dive in seven years as prospect of no more #Fed hikes sets in https://t.co/7ohCCiLuDt pic.twitter.com/jlPawdbjgs

— Pedro da Costa (@pdacosta) February 3, 2016

This after the market had taken the US Dollar Index to fresh highs in years, expecting the normalisation process to further strengthening the Dollar against both major and emerging market currencies. Last year emerging markets had to fend off severe headwinds in their currencies as dollars originating from the Quantitative Easing program that were seeking above zero percentage returns started to unwind and make it way back home.

As a result, commodities saw their prices shrink to multi-decade lows as the dollar strength made the purchase of these goods more expensive than they had been a few years earlier in effect dissuading Chinese producers from gobbling up as much as possible, even when faced with the reality of economic contraction of its own making.

To emphasize the sensitivity the dollar is having on commodity prices one only has to look at the price movement we are witnessing today after the slump in the dollar following the news. If a incremental down move can have such a rousing response in commodity prices you have to wonder if perhaps we may be past the worst of the storm but only time will tell.  

Mining companies surge by most in 5 months as metals rally https://t.co/aqBT6vSHPk pic.twitter.com/Z3T1qvZBvG

— Bloomberg Business (@business) February 4, 2016

Who's the Apple of the market's eye? Alphabet Inc

Last week Apple reported dismal numbers that made the market cringe in horror as the reality began to set in that current management may not have what is expected to continue its pathway from an amazing rebirth after facing a number of difficult years producing mediocre products that simply didn't catch the imagination of technology consumers. I wrote that if Apple were to remain with the current strategy they ran the risk of falling behind the curve in terms of brand and innovation.

The fact that not so long ago Apple became the world's largest listed corporation exacerbated the amount of attention drawn on it to succeed in bringing to market the same innovation it has been doing over the past decade. As much as the title brings about bragging rights, there's also a test of consistency that is coupled alongside it that must ultimately be answered.

Usually these occasions are headlined with much fanfare when one company overshadows its predecessor with commentary closely resembling that of a newly coronated monarch and rightly so as the move often marks a change in an existing trend. When Apple overtook Exxon Mobil in 2011 to become the world's largest listed company it symbolised a shift from reliance on energy as a need to fuel an economy to a more technological based system that would form an integral part of humans lives in the way they made decisions as well as simplifying miniscule tasks with the help from applications that lightened the load and made it easier to transcend the collection and distribution of data.

We've seen a continuation of that trend since Apple took over as Big Daddy however we are starting to witness an evolution of the ideological thought away from the company who created a need that hadn't been seen before to one where the consistency of innovation takes precedent as a means to measure competitiveness within the technology industry.  

Alphabet overtakes Apple to become the world's largest listed company https://t.co/4Bg4jYEBYI pic.twitter.com/5tC8It1v5P

— The Economist (@ECONdailycharts) February 3, 2016

Failure by Apple to bring any meaningful product to market that would not only raise revenues but also boost confidence in the abundance of supply of staff members capable of producing the kind of innovation expected of them now means that the tech giant has conceded its position as the world's largest corporation to long time rival Google who recently changed its listed name to Alphabet.

The move all but confirms this as the momentum built up from Alphabet in recent months has seen their stock price gradually gather enough steam to catapult to the top of the ranks. Their results went down much smoother than Apple's did even though they reported huge losses in divisions that are anticipated to keep revenues steadily climbing in years to come. It shows a mark of confidence in management who have a firm grip on what is needed to sustain this business.

Added to the fact that mobile technology is already integral in our way of living and perhaps the shine Apple once used as a selling advantage being the coolest new gadget around has lost its gleam as consumers are looking towards more usability rather than aesthetics.

I think the market recognizes that Alphabet has always been ahead of the curve and the certainty of this consistency is what will drive its competitive advantage in years ahead.