3rd European lender comes under scrutiny in less than a week

It's been quite a week for the European banking community who've faced years of shallow earnings due to the low rate of interest offered by the ECB in order to perk up economic growth but more importantly halt the slide in prices away from the unwanted presence of deflation that could make policymakers lives just that much harder.

The European Central Bank's desire to spur on growth with easy money at below zero interest rate means the banking sector in Europe are having a tougher time generating income from conventional means, putting stockholders out of pocket in terms of dividends and sending the industry into a downward spiral in attempts to find alternate forms of return that aren't appropriate risks.

We saw speculation around the continuity of Deutsche Bank's existence enter the fray at the beginning of the week with many investors not seeing much hope for the German lender who has its back up against the wall with a litany of legal cases to deal notwithstanding a whopping $14 billion fine imposed on it by the US Department of Justice relating to the mis-selling of mortgage backed securities at the climax of the Financial Crisis bubble.

Besides this inconvenience, management has to deal further with the bleak outlook of oil prices having made considerable investment into alternate energy resources, most notably in the United States with regards to shale gas extraction. Lower oil prices has seen US producers battling to eradicate losses let alone break even translating into a scenario of a house of cards for the European lender.    

Largest Dutch Bank To Fire Thousands https://t.co/4b3wbEhLdt

— zerohedge (@zerohedge) September 30, 2016

Since then we heard from the second largest lender in Germany and main competitor to Deutsche Bank, Commerzbank announcing a restructuring program that'll see 9600 jobs shed by 2020 and dividends cut to fund it. Deutsche Bank has a similar program in place so it was only a matter of time before the others joined the party.

Today we've heard unconfirmed reports that the Netherland's biggest lender, ING Group, might effect the same when it hosts its stockholders early next week leaving many wondering if these measures will become commonplace amongst Europe's top lenders.

The crux of the matter is these actions should send alarm bells ringing in the headquarters of the ECB who have insistently delved deeper into the experimentation of low interest rates for extended periods on end without fully realising the wider consequences of their own actions.

We shouldn't forget that one of Europe's greatest value producing sectors is the financial industry, providing thousands of jobs for highly skilled people who spend a high amount of their incomes in other sectors of the economy. If the proposed job losses are to go ahead all the good the ECB believes it can do in helping economic growth tick up will fall in a heap.

It again comes down to what I've said earlier in the week, the decision by the ECB will not be taken on which action produces the best outcome but rather the one with the least consequences.

3 introspective questions to ask yourself when your trading isn't working

Keeping consistency as a trader is one of the most difficult aspects to deal with especially when you're a new trader looking to find some sort of evidence that shows your efforts beginning to pay off after burying hours of firsthand experience into an activity that doesn't always reward endurance.  

There are often periods during the foundational phase in becoming a trader when doubt casts a long shadow over the sustainability of our long term success if encountered with a disastrous losing streak that seemingly puts our skills into question. 

Reflection is a great way of looking back on your trading performance and determine whether you've drifted away from your original plan or take not of market misfortunes that could've swung a heavy blow to your trading account and more importantly your confidence. 

Here's are a few questions to ask yourself when you doubt yourself: 

Have I employed the correct risk management in my trading? 

Often you hear of traders who become so confident in their brief trading results they lose focus of the reasoning behind sizing down the severity of risk and its impact on their trading account and instead go for profit glory. In the end they finish with a broken ego and a trading account with less funds than initially started.  

If you tick this box then you need to relook at the way you deal with risk and if you're able to accept the learning process will have many stumbling blocks of which you will fall upon along the way. By taking on more risk than what you should be you're decreasing your chances of staying in the game for a long period of time.  

Am I utilising the advantages of a trading strategy or taking trades based on guesses?

A crucial indicator in assessing if you've got the skill to be consistent considering most successful traders have a trading strategy that's be back tested and proven effective. Strategies take a lot of the uncertainty of non-planning by having pre-determined rules for the placement of stops and exits as well as entry points. 

However as a new participant you aren't acquainted with a workable trading strategy that fits the exact market conditions your trading in, leaving you vulnerable to being sucked into a financial black hole by basing trade's off guesstimates. 

Strive to devote time in studying the actions of the market by taking down notes and observations of what you see. Start with the most basic of trading indicators, namely price action, and work yourself through the most well known one's so you're understanding is aligned to what others may be waiting on for a signal.     

Can I interpret the market condition and implement the right strategy at the appropriate time?

Market conditions are essential in profiting from trading but knowing when the best times to be in the market as well as the right trading setup to employ at that specific moment makes all the difference. Realising that the market doesn't generate the same type of movement day in and day out goes a long way in avoiding the trap of overtrading and taking trades that don't match the market's expectations. 

The different forms of the market don't unfold themselves in one month let alone a year which is why it takes a number of years of being actively involved to truly understand what you're dealing with and how to tame the nature of the beast. 

Why is the European financial system is getting shakier by the day?

The pressure inside the European financial system doesn't seem likely to lower anytime soon with the latest development coming out of Deutsche Bank who received a demand from the US Department of Justice ordering the corporation to settle a $14 billion fine related to mortgage-backed securities that were mis-sold to the public during the build up to the 2008 Financial Crisis.

However top management responded quickly to dispel speculation over the mammoth amount it could potentially have to pay over to US authorities by indicating that it expected to pay the penalty but confidently said it would be able to negotiate a lower charge as US banks had done prior to settlement.

This comes on the heels of an impending Italian banking crisis that threatens to renew fresh calls for a breakup of the world's largest economic trade bloc, the EU. Currently Italian banks are holding a monumental €360 billion of soured debt on their balance sheets with little to help free up bankers ability to deal with it. Much of the focus has been turned on the world's oldest bank, Monte dei Paschi, who seemingly looks like the weakest link in a long line of exposed institutions.    

Deutsche Bank says to solve problems without help from Berlin https://t.co/4SzoXE9T3v pic.twitter.com/5OTWETYYkK

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

Looking past the calamitous state of affairs, one aspect remains the chief detriment in the destruction of the European financial system which is the issue of low and negative interest rates, a sore topic for most banking institutions in Europe who have bemoaned it's place and suffered gravely as an inability to generate healthy income has been stunted by its protracted implementation.

In the case of Deutsche Bank, management had decided to offset the effects of a slim delivery of earnings through increased exposure in riskier assets, some of which included loans to the US energy sector. All it took was a collapse in oil prices for fear to be released amongst stockholders surrounding the capacity of Deutsche to absorb the losses incurred from non-performing loans when considering the little reserve's built up from bleak earnings.

With Italian banks it's a situation of institutions being in possession of inexpensive liquidity coupled with lowly sustained economic growth that caused government to use banks in averting a crisis. But as what we've seen evolving in the broader EU economy, increased monetary supply didn't lead to the deserved effect so many policymakers had wished for leaving many big name banks in a precarious position of holding onto debt that couldn't be paid for with the absolutely no prospect of growth in the future, only driving the fear of a mass default even closer.

The problem the world has now and more specifically the European Union is deciding what action will yield the least consequences because if we cast our minds on either objective we soon realise that there can be no relief from the pressure if the curtailment isn't dispensed in the other.The ECB is trying so desperately to get European consumers and manufacturers to produce value but in the same breathe pushing the stability of their financial system into jeopardy in reaching its goals.  

Technical Tuesday: Wal-Mart Stores Inc.

Weekly

Surveying the weekly price chart for the past two years in this stock would show that there's been significant moves in both directions with the latest rebound off the lows providing opportunity for trend followers to profit again immediately after a break of the downtrend. 

Price action has however slowed down since July 2016 with the highs unable to push further and motivate buyers to close the weekly candles above the all important $74 mark. This level comes into play after a failure of support last year prompted the stock to slump to new lows. 

Having only just come back into focus, the resistance being offered at these levels suggests the line identifies polarity with the possibilities of an equivocal outcome that'll be determined by the failure or success of either buyer or seller. 

The moving averages of 50(yellow line) and 200(blue line) shed some light on what we could expect from price movements in the weeks ahead. The 200 MA falls closely below the line of polarity at $74 with the 50 MA showing a slight gradient but looking more flat than anything else. This would hint at a range bound environment set in place which is further evident when we look at the stochastic shooting up from oversold and the positioning of the price with the conclusion being made of a lack of substance in the move upwards.     

The Closing Position: Wrap of this Week's Blogs

Is the Fed's action a catalyst to monetary policy normalisation?

Technical Tuesday: Honda Motor Co

Investors vs. Policymakers: Who's suffering the most from Confirmation Bias?

How confirmation bias affects your decisions & what to learn from it?

Why novice traders often encounter doubt? 

Why novice traders often encounter doubt?

It's easily said the primary focus most needed in mastering how to trade lies not in finding an optimal system to profit from consistently but rather dealing with the package of emotions produced as a result of our trading activity. But some forget that although trading textbooks might define the most common place feelings that are distinctive to most traders, namely fear and greed, they often forget other catalytic emotions that almost always lead up to the extremity on both ends of the scale.   

This broad definition of what emotions traders need to be aware of doesn't compensate them for the frustration gone through when faced with the knowledge to vastly identify with either fear or greed but struggle to cope with comprehensively dealing with the specific cause of the emotion. 

The minute there's a realisation that our trading abilities might be beyond what we thought was suffice we immediately plant the seed of doubt in our minds that we aren't good enough at what we doing which has a tremendous impact on our self confidence. 

Doubt, being a secondary emotion to fear, is defined as uncertainty swirling around in the mind stemming from a difference in a perceived outcome which is expected and the actual occurrence of such event. The best way to describe it would be to compare it to a gap in the mind between what you think will happen and the eventuality of it occurring. 

When confirmed, the void between the gap makes the mind feel the need to understand the reason behind the difference, unaware that in the height of fear all possibilities seem likely. Your mind starts filling up with scenarios of what could've gone wrong which doesn't help at all since the amount of variables involved in trading provide an infinite number of scenarios that could unfold. 

How does doubt introduce itself to the new trader? 

If new traders have never encountered the various types of market conditions an asset class can experience at different times, then its expected for them to assume confidently, only having found a system that's worked well in current conditions during the peak of the sentiment, the system they're operating could reliably be implemented on a continuous basis and expect it to churn out handsome profits consistently regardless of the market conditions. 

Nothing can be farther from the truth which becomes apparent when the sudden transition between the markets complacent thinking is replaced with fresh retrospection, shifting the market's sphere of movement and direction into a motion that deviates from the profitable system. This leaves the trader negatively affected after coming off a high built up during the time the system worked till now when it only produces loss after loss, denting confidence and introducing the emotion of doubt into the mix.      

Do they ever come back from this setback?

Of course they do depending on their willingness to take on an active approach in understanding their emotions and the effects they have on the decisions they make in the process of trading. It also comes down in accepting the foundational years of trading will not be showered with profits but rather how well you embraced the learning process above bragging how little you did to reap reward.  

Throwaway the idea ingrained by online trading ads claiming to offer the "secrets" to trading the markets in favour of a accepting the wealth of information required isn't broadcast through "Get Quick Rich" schemes but rather the amount of time spent observing the markets behaviour and more importantly...yourself.  

How confirmation bias affects your decisions & what to learn from it?

As market participants we're often confronted with an array of emotions when observing the daily ebbs and flows of various financial markets. Most of the time these emotions are brought to the fore by the way we interpret different pieces of information in a number of diverse ways.

However if not managed or understood properly our minds are exposed to the vulnerabilities of misreading the information presented to us by selectively picking which type we choose to process instead of using a holistic approach.  

There's a term in psychology that refers to a person's mindset when his/her ability to perceive a situation without bias is hindered by the insistence of their beliefs being accurate in every detail to such an extent they jeopardize possessing full clarity by ignoring information that refutes their view and paying attention only to that which supports it.

If you haven't heard of it before, it's called confirmation bias, a well documented human tendency that has significant relevance within financial markets, especially towards those responsible for taking decisions based on opinions of an investment.

Depending on the strength of conviction the severity of damage to investment capital will be directly related to those who hold a greater belief in their assertions than others who are willing allow the flow of information to process through their minds without presumption holding a considerable weight in their eventual decision.

Here are a few things we can learn from confirmation bias:

• Accepting that success is never guaranteed is crucial in understanding that there are no certainties when it comes to dealing in financial markets, a key to managing the risk on your capital in every facet of investing or trading. 
• Human's natural inclination towards accepting a widely held belief can only be changed by a sudden event that abruptly shakes the variability of thought into motion. This implies we are prone to being complacent but also influenced heavily by the onset of doubt generated after the initial thought is disrupted by the possibilities of alternate outcomes. 
• Having a fixed belief can be advantageous in finding certainty of trend but there needs to be a balance of thought in realising that at any moment that belief might turn out obsolete which stresses the point of having a limit to the amount of losses you're willing to commit too.  
• The longer a firmly held belief remains in place, the more accumulated people feel convinced by it and thus a larger reaction when it all changes. 
• All markets are subject to scrutiny but it's the belief that holds the greatest defence that wins the day. An openness of thought helps in noticing the cracks before they fragment into disbelief. 

Investors vs. Policymakers: Who's suffering the most from Confirmation Bias?

There's a term in psychology that refers to a person's mindset when his/her ability to perceive a situation without bias is hindered by the insistence of their beliefs being accurate in every detail to such an extent they jeopardize possessing full clarity by ignoring information that refutes their view and paying attention only to that which supports it.

If you haven't heard of it before, it's called confirmation bias, a well documented human tendency that has significant relevance within financial markets, specifically towards those responsible for taking decisions based on opinions of an investment.

However I'm not here to talk about the decisions made by investors which might be overcome by this bias but rather those in prominent policymaking positions who dictate the direction of an economy as a whole and hold an influential role in deciding what balance works best.

One would think it's safe to assume that these figures have the necessary requirements to equip them with clear thought on growing variance on either side of the economic spectrum and in effect be bring about consistency to the pathway of growth instead of extremity.

BoJ doubles down on easy monetary policy https://t.co/vshzMQnKYs

— Financial Times (@FT) September 21, 2016

But this thought is becoming evermore irrelevant when we come to realise that the power once enjoyed by these economic mechanics are losing their influential grip of reality by overlooking data which suggests their actions do more to distort than anything else but instead choose to merrily continue along a path destined to produce failure.

The Bank of Japan announcement pertaining to the scrapping of monetary base targets and replacing it with "yield curve control" reiterates the point being made that central banks around the globe and more importantly those in the developed world aren't willing to admit defeat in the lack of substance of generating a full economic recovery from the toolbox of available policies.

Merely changing tactic won't change the skepticism being built up around the abilities of these policymakers to effectively take hold of the situation and steer proceedings in the right direction.

Technical Tuesday: Honda Motor Co.

Weekly

A long period of consolidation trapped the price between a range of  ¥4400 and JPY ¥3250 for three years which would translate into incredibly frustration from investors at the lack of any proper direction. 

However a resolution was found in the beginning of 2016 when the price wasn't able to hold long term support and broke to the downside playing into the hands of the sellers.

Observing the consolidatory movement it's easy to notice the distinct technical pattern of a Double Top that formed during this phase and would suggest a conclusive end to a definite trend, in this case the uptrend. The pattern also helps us identify potential levels where price can find support in lower areas of the chart. 

Price has rebounded off the lows at ¥2450 whereafter it staged a good effort to make back lost ground but not without skepticism as it fast approaches a previous support line of ¥3250. It's assumed that this line will provide stiff resistance which has proven evident in the reversal of the price candle in close proximity to it.  

The 50 day moving average is pointing down strongly indicating the strength lying with the sellers. Added to this is the bearish continuation divergence playing out on the Stochastic which makes it harder for the buyers to feel comfortable in believing the price will go higher from here. 

Ultimate target for the Double Top would be at ¥2295 which seems likely to happen and given the levels where price is trading it could make a profitable medium term trade. 

Is the Fed's action a catalyst to monetary policy normalisation?

This week see's both the Bank of Japan and US Federal Reserve divulging the progress of their respective monetary policies with the market leaning on expectations of a steady advancement of a dovish undertone in the months ahead as many of the developed nations central banks battle to flex it's economic muscle in moving activity forward.

But with the Fed's policymakers insistence of a interest rate hike occurring within the last two meetings of the year, the market is growing skeptical of any such actions as its counterparts remain committed to immersing their economies with "free money" in a bid to shield them from deflation placing the Fed in a predicament where it stands to decouple policy alignment by implementing an opposing strategy than it's peers.  

The perpetuate notion of the central bank's delaying the inevitable and effectively stretching out monetary policy longer than would be seen as plausible in the normal course of a business cycle continues to spill over into current thinking amongst policy makers with many assuming the hindrance of such actions being brought about to appease market valuations.

The old Fed is dead https://t.co/E0NpqCMCXO

— Michael S. Rubin (@mrubin63) September 19, 2016

However the longer the Federal Reserve's holds up marching forward with interest rates, the less credible the inferences made from statements become and the less likely the market will find comfort in finding a voice of reason when dire consequences take hold.

Alternatively it could ignore the warning signs and impose interest rate hikes on the global economy but it could come with the cost of having to take the blame for throwing the entire financial system into disrepute by upending the ambivalent calm that lies in the market which doesn't conform to the thought of sharing the responsibility in an age of globalisation.  

Either way the Fed is stuck between two evils of which the decision will ultimately come down to choosing the one with lesser impact, but it won't take away from the necessary action of departing from the thought of monetary infinity.  

The Closing Position: Wrap of this Week's Blogs

PBOC introduces interest rate uncertainty with HIBOR surge

Technical Tuesday: Vodafone Group Plc.

Are financial derivatives necessary tools in trading?

What is Recency Bias and where it applies in trading?

Is your trading being affected by Recency Bias?

Have you ever been in a situation whilst trading where you've felt ecstatic after a series of wins that you begin to feel as if the streak you're on will last forever?

Fast forward a few trades later and suddenly you aren't feeling so great anymore after a string of losses has placed you in the same position as when you started from. Quite a demotivating encounter to be dealt yet one of the most crucial aspects of trading is shone in the spotlight. 

The Recency Bias occurs when your mind becomes accustomed to an existing pattern recurring at a particular moment. The frequency of this pattern is enough to convince your mind of it's relative ease due to it's repeated presence but more importantly to assume that such pattern will remain indefinitely.  

This common misconception is often seen in the early developmental stage of a trader's career when the acceptance of the uniqueness of each event isn't fully understood. Not only does it negatively impact a trader's confidence but it also has the consequence of reaching a conclusive opinion that the effectiveness of the pattern as futile. 

Nothing can be farther from the truth in realising a patterns full potential lies not in the consistency of generating a signal but in the most favourable conditions in which it works well in. As a newcomer to the trading game, you can't be for certain of these conditions when you've only implemented the idea once. Added to the fact that there are a number of different conditions the market undertakes at various times, it's becomes easier to see when deciphering the truth that trading isn't an overnight success story. 

Taking for granting the status quo in markets is a sure way of blindsiding your view when it comes to making the important decisions during the process. Being cognisant of the markets deceptive ways is possibly one way to avoid falling through the cracks however the need to practice it continuously is probably the most difficult part. It requires discipline and patience to learn from it that separates the great traders from the rest who don't make it. 

There's a saying in trading that goes "You're only as good as your last trade". 

This speaks so closely when referring to bias, especially the recency type. One moment you have it and the next it's gone. 

I tend to think of it as being similar to the actors and actresses of Hollywood. There are those who crave the attention of the spotlight  and become more famous for their sideline antics than actual performances but nonetheless get fed up with it after discovering the infringement on their personal lives and how closely people will follow their every moves.

Then there are others who find it more worthwhile concentrating on their roles and producing the best performance that distinguishes them from everyone else that there's no need to go looking for the spotlight, it merely comes to them.   

Are financial derivatives necessary tools in trading?

When I was first introduced to the concept of derivatives a few years ago the idea excited me. I got to work immediately on finding out more about these financial creatures of wealth creation. It felt as if I was in speculators heaven. I could take a position on the market both ways and not have to tie up all my money doing it.  What could ever go wrong?

Type in the word “trading” into a search engine and you'll be bombarded with a vast amount of offers by brokerage houses tempting you to open an account that'll help you obtain the financial independence you've been hoping for.

Yet one thing still evades the financial community; do novice traders truly understand how derivatives work?  

To find a suitable answer to the question I cast my mind back to when I first encountered the concept of derivatives during my time in varsity whilst studying finance and economics. I was in my final year so I had an elementary grounding in the basic knowledge of how financial markets operate and how their movements were induced. This is when I stumbled upon an exclusive investor’s newsletter advertising a very “lucrative secret” few people knew about in becoming instantly rich. I highlight the words "instantly rich" because you often learn too late in the process that instant isn't a frequent event in trading and the word rich is a fool's fallacy.

Being the curious creature I am, I decided to explore the topic further on the internet by researching various claims by brokers' in promising financial freedom. The results were staggering with claims ranging from “Make $2000 from $500 in just 3 weeks” to some sharing fictional stories of people who've had no prior knowledge to the workings of financial markets but were able to garner success with relative ease.  

If it were easy why wasn't everyone else doing it then?

I opened a free 14 day trial account loaded with $100 000 demo capital to see if I could thrive as effortlessly as the people's stories shared on the broker's websites but to no avail. What I do remember from the experience which at that time involved very little analysis of any sorts and leaned more to "trade and hope it works out" without any real understanding of how traders timed their entry and exits from an instrument.

With a considerable amount of luck I was able to hit a winning streak by trading oil contracts back and forth on a minute to minute basis but this didn't last long as my guesstimation of where the price could be headed to was interrupted by a definite trend in the opposite direction of a contract I had just taken based on no analysis, effectively placing me in psychological warfare with my mind of what to do. 

It's certain to say my interest in trading tapered down following this and the fact my trial period had ended meaning I would only be able to try out my skills as a trader if I used real money, something I wasn't prepared to do seeing I couldn't be decisive, a skill I flagged as being necessary in trading.

Refusing to give up I saw an opportunity in better understanding the process of trading by unpacking the concept around the instrument used in making it possible, that being derivatives. The course entailed learning how to calculate the price of different types of derivatives focusing on the more commonly known one's such as forward and futures contracts, options and swaps.

But that still didn't give me the solutions I was seeking to find which was if trading was a sustainable income generating activity that could amass wealth in a relatively short period of time.

What the course did highlight was the target market being advertised to wasn't fully aware of the complexities of managing such instruments and the proper use for them fell into the category of hedging away risk. The connection between those who understood the beneficial utility of using these tools and those chasing a financial pot of gold was so detached, the dangers of irresponsible use was accentuated to a frightening degree.    

Going back to the question I posed earlier in asking if the stakeholders in the financial community were aware of the indiscriminate use of these instrument by the public in general in knowing they don't have the necessary understanding to operate with these tools, the answer is an emphatic YES.

In fact they falsely use the abilities of leverage to mesmerize the public on the wonders of gearing but fail to stress the extremities of risk when doing so.

They also possibly do so to keep the market liquid with easy prey to feed from with the more experienced trader looking to profit from insufficiency lurking around

But in saying this, derivatives have become part and parcel of the makeup of a trading business. Their use enhances a trader's ability to profit from minute incremental moves with efficiency where other means can't. They lower both transactional costs and barriers to entry with the theoretical aim of making the availability of all securities as freely as possible to allow for mass participation.

The importance of understanding every part of the trading process is nowhere stressed more so than in derivatives. From the amount of exposure you're willing to take on to where you place your stop loss, it all comes down to understanding and respecting the use of these instruments.

If you're goal is to be a long term profitable trader then you need to ensure that the products you choose, the securities you trade and the broker you deal through offer you a clear picture of what you'll be operating with. It's also important to remember that although your broker may offer you more gearing than you need, it's not a requirement or necessity to use all that's available.  

Derivatives have tempting ways about them and somehow know just when to elicit the right responses from fear and greed respectively.  

Technical Tuesday: Vodafone Group Plc.

Monthly

An established uptrend has been in place since the lows registered in 2009 with a steady progress in upward movements. The price has consolidated for two years into a symmetrical triangle with the prospects of coiling to the upside. The 50 moving average is trending up nicely with the price above it. 

The stochastic is currently within the overbought region which makes the probabilities of a break to the upside in the short term less likely. If we were to see a break, it'll likely happen after the stochastic has worked itself off but this put's the break at risk of rolling over into consolidation. 

PBOC introduces interest rate uncertainty with HIBOR surge

Who can forget the events of 11th August 2015 when the global financial system was sent into a tailspin after a decision made by the People's Bank of China relating to the way it fixed the price of it's currency, the Renminbi, brought chaos into financial markets worldwide when participants suddenly feared the abrupt devaluation of the Chinese Yuan was suggesting all wasn't well underneath the surface in China.

After heavily intervening in it's markets, the PBOC was able to bring about stability to markets again following a six month volatility spell that sowed distress throughout financial markets, an achievement that was applauded last month when market participants marked the one year anniversary since market turmoil began and subsequently referred to as the Yuanniversary.

Most commentators had said the central bank's market orientated approach to currency movements as opposed to intervention had boosted confidence in its ability to prevent financial contagion but were skeptical of it's consistency of following up with it.  

It wasn't long before those doubts cast a dark shadow over financial markets with the latest surge in the benchmark Hong Kong Interbank Offered Rate jumping to the highest levels in months on speculation the PBOC was holding back liquidity reaching the offshore market in Hong Kong.

AsiaPac Stocks Plunge Most In 8 Months As China Money Market Turmoil Accelerates https://t.co/Lkxggdnxc8

— zerohedge (@zerohedge) September 12, 2016

These latest interventional measures were prompted by the PBOC's defence of the 6.70 level on the US Dollar against the Chinese Yuan with policymakers resolute in upending the weakness that's occurred in recent months saying any further devaluation could spur on an increase in capital outflows due to concern. The outflows that happened during the height of last years panic stricken commotion is yet to return with the result being a tighter monetary supply leading to a shortage of foreign lending into the economy.

This would translate into a weaker outlook and eventually a weaker economy, something Chinese policymakers are unwilling to lose given the stability created thus far.

But in creating a liquidity shortage in the offshore market the PBOC is implying that restrictive monetary conditions are well on their way, ravaging the markets expectancy of perpetual money creation from global central banks and introducing volatility back into the system.

If contemplating the tone of a number of central banks statements, it's difficult to interpret a set pathway with the Fed providing an ambiguous thought on the continuation of rate hikes and the ECB noting it's view of seeing rates lower for longer but no discussions underway about a possible extension of its current quantitative stimulus program.

The confusion being created in the midst of monetary policymakers hesitancy to offer the market confidence is generating uncertainty that's dictating the movements. It's highly doubtful we'll see any clear direction in the short term until we see the outlook become less hazy.

The Closing Position: Wrap of this Week's Blogs

Are freight companies in the same boat as Hanjin Shipping Co.? 

Technical Tuesday: McDonald's Corp.

Riksbank highlights the risk the ECB's is creating for other economies

Why markets increasingly becoming correlated spells trouble?

Central banks defiance of reality can't last forever

Central banks defiance of reality can't last forever

Yesterday's interest rate announcement by the European Central Bank didn't pull any surprises with an unchanged commitment to continue stimulus measures until it's expected expiry in March 2017 but ECB president Mario Draghi saying the central bank foresees interest rates remaining low for an extended period of time.

He also took a hardline stance on European governments implementation of structural reforms which he said were urgently needed in their respective economies but was reluctant to confirm the looseness of monetary policy was reaching it's limits and would be tightened whether or not reforms were in place, minimizing the seriousness of his tone.

We've encountered these undertones on a number of occasions involving central banks being unwilling to contemplate the thought of bringing monetary policy back into the sphere of normalisation by acting as a saviour for fiscal sluggards who fall short of finding long term solutions for their nations infected with epidemic economic discord.    

The European Central Bank has done about all it can do. https://t.co/tRIeuQS80N via @BV #ECB #Draghi

— Piotr Skolimowski (@Skolimowski) September 9, 2016

The longer we continue to see central bankers refusal to force the hand of governments to shape up, the higher the expectancy of market participants perennial thought of quantitative easing remaining indefinitely and with a greater propensity distort the overall picture.

Although the unequivocal endurance from central banks in their fidelity of the belief that more is better may show the characteristics of bravery in the face of adversity, the limitations of the market will eventually erode this might with is ever protruding flash of reality.
   

Why markets increasingly becoming correlated spells trouble?

Ahead of today's announcement from ECB president Mario Draghi relating to a decision whether to make the monetary environment in Europe more expansive than where it currently stands, we heard yesterday from Sweden's Riksbank who gave promising commentary regarding the country's economic outlook yet added that it's monetary toolbox remained opened and should further intervention take place on the part of the ECB it wouldn't shy away from continuing its extended run of stimulus.

I expressed concern over the matter by saying the ECB's partial contribution towards distorting asset markets along with other advanced nations enacting the same strategy with similar force, namely the Bank of Japan and Swiss National Bank, was overstating central bank's need to influence these markets closely but also directly competed against their smaller counterparts like Sweden who had no choice but to put up a brave defence in imitating what the bigger central banks were doing but were likely to be defeated due to comparative size.

New evidence shows that assets have become so distorted that the utilisation of diversification through the process of portfolio management won't mitigate the risk often associated with having a variety of distinct assets.

Asset contagion worse than 2008 as markets held hostage to rates https://t.co/44y6zYxZYX via @luwangnyc pic.twitter.com/so5w6ILsn3

— Bloomberg Markets (@markets) September 8, 2016 

The Credit Suisse Cross-Market Contagion Indicator measures the interconnectedness of different instruments price movements in relation with one another in finding the correlation amongst the basket of instruments that includes foreign exchange, commodities, bonds and equities. An optimal outcome for this indicator would be to suggest there's little correlation between instruments however the current reading says the risk of contagion is higher than it was pre-Financial Crisis.

Contagion would occur due to the direct relationship asset prices have taken on with one another and if a market crash were to happen the effects wouldn't be isolated to one asset class.

We've seen an extensive rally into bonds returning positive yield and in some extreme occasions investors being forced to accept longer term maturities in exchange for meagre coupon payments. The zero yield parade not only pushes the prospects of bond investors into jeopardy since the convexity (the rate of change in bond prices when rates increase/decrease) is alarmingly high, the tiniest of interest rate hikes could trigger a full blown financial market crisis it seems.

The responsibility falls squarely on central banks around the globe but as much as we can play the blame game perhaps we should give thought to the idea of a state in the global economy where monetary policy has exhausted it's options, government coffers are burdened with huge debt bills to pay with lenders insisting on reducing the load, effectively creating a situation where no interventionist policy is in place to guide the world economy forward. Absolute chaos but closer than what you think.

Riksbank highlights the risk the ECB is creating for other economies

Often a precursor to an announcement from the ECB, Sweden's central bank Riksbank assessments of the economy, inflation and international events affecting its currency, the Krona, are ordinarily interpreted as steps towards aligning it's monetary policy closer to its counterparts in Europe with the most notable being the European Union in having the greatest influence on the Nordic nation.

So you can imagine the reaction of market participants when governor Stefan Ingves reiterated that the central bank was ready and able to reopen it's monetary toolbook if further expansionary policy was needed to avert a short lived weakness in it's currency due to the actions of the ECB.

The central bank went on to say the uptick in both inflation and economic activity were positives for the country saying it was producing the desired effects that were intended from the use of an unconventional yet radical approach of negative interest rates which has caught on in a number of advanced economies.  

Riksbank Reiterates Readiness To Do More https://t.co/C68PQgitDg

— Livesquawk (@Livesquawk) September 7, 2016

Its use amongst some of the most trusted central banks in the world has called into question the integrity and perhaps desperation these policymakers who are willing to go to extreme lengths in reaching their economic objectives. Although not tested, the potential pitfalls of such policies will only be seen after the damage has been done which could be little to late.

The commentary provided by Riksbank in relation to this highlights the additional risk being introduced into the financial system as a result. With an economy 25 times larger than Sweden's the European Union's armoury needed to defend it's economy from the contagion of deflation would be so much larger.

It goes without saying that the money creation process needed to avoid a crisis in the EU is to such an extent it adversely impacts the positioning of the Swedish Krona against the Euro with the only response that can be used by Riksbank is to imitate the actions of the ECB.

This only serves to further supply liquidity to an existing global economy that's become distorted by the years of low rates and excess money.

Technical Tuesday: McDonald's Corp.

Quarterly

The following chart is a perfect textbook example of long term upward trending continuity with the foundations of this uptrend starting in 2003. There's an element of a steady uptick in its progression to higher price levels which indicates sustainability in the price trend. 

As priced reached the round number of $100 it began to consolidate for three years between 2012 and 2015. This gave enough opportunity for the bulls to keep prices aloft whilst consolidating towards the long term uptrend which successfully found support and set forth on a fresh charge upwards. 

On the RSI, highlighted with a yellow rectangle is an area of endurance on the part of this indicator. This reaffirms the notion of strong continuity in the uptrend of this stock and would possibly be wise to be flexible when deciphering the change of momentum with 50 usually the conventional point to watch out for however noticing that the indicator hasn't come close to this mark in recent times but instead found support higher up on the indicator.  

In the second quarter of this year price action produced a long tail to the upside but a bearish candle towards the bottom leaving many contemplating whether the short term rally could be withering out. It's likely the case with the differential between the trendline and price diverge quite a bit. We've observed on the chart that this particular stock has a tendency to find stability without venturing too far away from its trendline and perhaps that kind of sentiment could develop in the months ahead. 

Weekly

We see a much different picture when we scale down into the weekly with a prominent topping formation in place at the heights of all time highs. Price has broken down beneath the neckline but the 50 moving average still looks sturdy which can offset any downside move.

The RSI has markedly produced a series of lower highs with the most recent generating enough of a kick to throw the indicator below the 50 level. The divergence between the two could spell danger if the price can't find its feet in recovering.

A support level can be found just underneath $105 which is the most probable place price would find itself in if enough downside momentum was given to the sellers.

Are freight companies in the same boat as Hanjin Shipping Co.?

The strongest guage of world trade activity is often reflected in the profitability of the shipping and cargo industry where huge payloads of containers are carried across the world's oceans with colossal-sized freight liners that produce a cost efficient advantage when utilising this mode of transportation.

But as prosperous as globalisation has made the industry's business model is as fast as its crippled many companies in the sector with the protracted downturn in China's economic growth that had been the direct link of a flourishing boom in recent years.

To add further woes to the situation the overcapacity of containers and ships leaving ports with partial loads have all complicated the outlook by squeezing margins in an industry that requires a steady flow of mass quantity to produce maximum returns.

Hanjin Shipping is trying to stop its ships from being seized https://t.co/ekhUlh3xXA

— Fortune (@FortuneMagazine) September 5, 2016

Big name casualties are beginning to emerge with the seventh largest shipping company, Hanjin Shipping last week filing for bankruptcy in Seoul in a bid to ward off creditors who are becoming incredibly frustrated by the lack of service of its debts. The company is said to be over indebted by $5 billion with the Korean Development Bank and other lenders refusing to grant additional funding to the troubled company that could've possibly seen it through these desperate times.

And as if this wasn't enough, a number of the shipping company's freight liners have been seized in foreign harbours namely Singapore and China, with port authorities saying the seizure of assets were due to the high measure of debt owed to them in lieu of services rendered whilst docked.

Having exhausted contingency plans put in place to halt the slide, shipping companies have reached a point where they can no longer starve off the necessary action needed to once again find balance. If the period of downturn which has been expected to last for a brief time is now being revised and extended, the chances of more of the same outcomes we've seen occur with Hanjin Shipping is inevitable to increase.

Overcapacity, oversupply, and overproduction are terms that have become a frequent phrases that have featured more prominently in recent times as the world economy bears the weight of indecisive, reckless and fruitless policy yet they send a stark reminder to policymakers that the self correcting nature of free markets are necessary when or else fails.  

The Closing Position: Wrap of this Week's Blogs

Interference in the stock market by Japanese government shows wary signs

Technical Tuesday: 3M Co.

European Commission orders Apple Inc. to pay Republic of Ireland $13.5 billion

Is there a need for privatisation in China?

Russia's voice in the oil debate is vital for progress

Russia's voice in the oil debate is vital for progress

Up until early August, much of the excitement around the resurgence of oil prices this year had been lost after market participants began noticing cracks in the sustainability of the moves citing OPEC members being at loggerheads with each other over the exclusion of Iran from a deal that looked set to freeze the production of oil.

Saudi Arabia, the de facto leader of OPEC, insisted on their inclusion saying Iran might use the opportunity to gain market share that could erode the position of other members but mainly itself. Iran countered by saying it had been sanctioned from trading its oil with the rest of the world and was in the process of mending its trade balance that had suffered badly as a result.  

The dispute between the two threw the power of OPEC into jeopardy by opening the door to retaliatory attacks against one another with Riyadh going as far to say to would increase oil output to record highs in a veiled threat intended to undermine Tehran.

But along came Russian oil minister Alexander Novak who suggested his country was open to revisiting the prospects of negotiating a production freeze after a meeting held in April between them and OPEC members fell through leaving producers in limbo. Novak said OPEC could possibily use an upcoming informal meeting between members to discuss the way forward.

Putin Joins "OPEC Headline" Fray, Pushes For Oil Production Freeze https://t.co/Nx725kAdzO

— zerohedge (@zerohedge) September 2, 2016

This revived up the bulls although only for a little while as the bickering flared up with Saudi Arabia proudly announcing it had reached an all time high in oil production for the month of July. The on and off commentary that's been swirling around since Novak made the comments has driven uncertainty off balance and dissuaded participants from taking a view on either direction.

However things look set to get interesting with Russian president Vladimir Putin adding his voice to the debate and throwing his weight behind reaching a deal without the inclusion of Iran. He went further to express empathy for Tehran saying the country has increased oil production from a low base and the effects of generating profits through oil revenue would be an added boost to its economy.

I've stated previously in the past that Saudi Arabia had abused its position in OPEC to suit its own economic needs while overlooking the distress in of others inside the group and it's bullyboy tactics threaten to tear apart the organisation with the possibilities of members "cheating" on the agreement to see higher oil prices.

Needless to say, Russia's support for Iran gives confidence to those who are of the belief that a production freeze is likely because it pits two giant oil producing nations against one another without creating conflict within the organisation. Russia may not form part of OPEC but the combination of their supply with that of OPEC equates to roughly 50% of the world's oil supply. Their participation in the deal is an absolute necessity for both OPEC and themselves.

And in saying this, Moscow can't afford to slip back on the economic work its done in alleviating the hardship suffered from its own sanctions imposed by the West after it annexed Crimea. Optimally it would benefit greatly if oil prices sat above $60 yet we still need to see them retain those levels with a degree of certainty that they'll stay above there.  

A leader as powerful as Putin weighing in on the debate highlights the urgency of finding resolve in the current environment.

Is there a need for privatisation in China?

China's ascendency in the ranks of economical hierarchy is largely attributable to the effort made by its government in shifting policy away from the state's hands into a free market oriented system where supply and demand dictates the price level in the economy. This has meant a considerable amount of Chinese citizens participating more liberally within their economy and thus driving growth on an upward trajectory that has seen this "Sleeping Giant" accomplish astounding economical feats in a short period of time.        

Needless to say as we've seen the mood sombre down after a hard landing many had hoped wouldn't occur, sentiment has changed from the once thought flawless motion of perpetual growth to a deeper look into the mechanical workings of its economy that have seemingly halted activity in a rather dramatic manner.

These investigative observation have revealed startling contrasts from the previous thought by highlighting a number of obstacles that remain incomplete leading to a stunt in growth.

One of the most prevalent of these is the ever presence of government's involvement in the economy although at a smaller fraction than it had been two decades ago but not near enough to be defined as an open economy.    

China's state firms are bigger than Germany and that's a problem https://t.co/3bGuJHc9wC pic.twitter.com/NaAEBxyEaJ

— Bloomberg Markets (@markets) September 1, 2016

An interesting compilation of research and data analysis by Bloomberg showcases the enormity of SOE's in China whose cumulative revenue eclipses the gross domestic product of Germany! That would register these firms income stream as the fourth largest economy in the world if they were considered one.

Herein lies the problem for China, as much as the figure may leave us grasping at the sheer size of it, these entities are at the forefront of receiving generous subsidies and bailouts from government as a measure of action used in fronting their objectives to the masses, one of which being employment. The use of these firms as a vehicle to absorb the negative impacts of reality only serves to intensify the inefficiencies they spew out and burdening the citizens with an incremental debt bill to payoff.

A great example of this happening can be seen in the Chinese steel industry where margins are traded off to prevent huge retrenchment of workers, an event government thinks could turn the tide on the positive image its created amongst millions of steelworkers. However China is merely exporting it's problems into the global market with the outcome being a glut of steel pushing prices down and pressing fierce competition amongst the world's top steel producers.  

Yet the likelihood of such endeavours continuing indefinitely is wearing thin as the Chinese government grapples to get hold of the nation's debt load which stands at 250% of GDP. The figure has raised the alarm bells for policymakers who've accepted that the country can no longer rely on the extensive use of debt to spur on growth as it once did.

Under the disguise of debt reform, the Chinese government will fast track the pace of privatisation by passing these firms onto to organisations that have the scope and ability to shape them into globally competitive industries but this would come at a cost of job losses and a drop in capital expenditure, two key aspects that's fuelled growth in the past. This possibly explains why government would prefer giving it up to business rather than itself in a bid to save reputation.    

The stagnancy of the Chinese economy means the current structure has reached its limits and the need to find a new avenue of bringing back the vibrancy of growth increasing with every ghastly review of the outlook. But this will only come if government were to accept a lesser stake in the economy in exchange for a greater competitive advantage in a global context, an admission that hasn't been offered...