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.  

Interference in the stock market by Japanese government shows wary signs

Much of this year's economic debate has centred around global central banks and more so those operating in advanced economies who have taken to exhausting the limits of its policies to new extremes in introducing bold yet questionable moves in shifting interest rates below zero for the first time in recorded history in an effort to curb a decline in economic activity.

Besides this, another crucial function of monetary policy is the asset sales and purchases that take place as part of the process of decreasing or increasing the money supply respectively. However over the years since the Financial Crisis central banks have announced numerous rounds of purchases all of which has created a shortage of appropriate instruments to use when stimulating.

The Bank of Japan has faced this dilemma for some time and has resulted in it now owning over half of the listed Japanese Equity ETFs. Not only is this worrisome but the continuation of this policy measure provides doubt concerning the true valuation of equities considering the artificial demand stemming from these purchases.  

Furthermore Japanese equities aren't only finding favour from the BOJ but also the Government Pension Investment Fund of Japan, the world's largest pension fund. The fund shifted it's strategy almost two years ago by opting to focus it's accumulation into equities whilst squeezing out bonds, a decision that was largely influenced by Shinzo Abe's government who saw the frightening outflows from Japanese equity markets.    

Bank of Japan and Government Pension Investment Fund own largest shares in 474 of ~1970 cos. listed on Tokyo Stock Exchange: Nikkei

— zerohedge (@zerohedge) August 28, 2016

However the fund made headlines for all the wrong reasons recently when it reported a loss of $52 billion for the quarter ended June saying it had been affected by the aftershocks of Brexit but more importantly the strengthening of the Yen, a factor that's been troubling government's for some time, leaving many wondering if the government's efforts to prevent a fresh crisis had failed in its entirety.

Combine the two organisations stakes together and they register as the largest stockholder in approximately 25% of all companies listed on the Tokyo Stock Exchange.

There can only be one conclusion when confronted with the facts, Japanese citizens don't share the same confidence in the country or its economy as its government does. If they did the government wouldn't find the necessity to hold such a significant stake to hide the truth...

Consider for a moment the scale with which an unwinding of such investment would demand from interested buyers.

Perhaps an economy that doesn't suffer from a lack of structural reform that subsequently weighs down efforts by government to turnaround the situation yet falters the economy at every site of a recovery.    

The Fed is being pushed into finding scope with negative interest rates

The search for yield in the current market environment has become an ever increasing theme that's gaining momentum from global central banks persistent decision to drastically rely upon the effects of fictitious money creation to kickstart the world economy. The unabating actions of these institutions has meant markets around the globe face the difficulty of finding decent returns and the prospects of being flooded by a wave of excess liquidity created in a monetary stimulating frenzy.

As the flow of money supply entering the global financial system eclipses the actual demand for it, investors are swept into seeking out riskier investments than usually accepted placing them with a grave dilemma to contend against. Either ignore the consequences of the risk or face having your money stagnate and in some cases drawn down when participating in negative interest rate deposits.  

ICYMI! The global high yield #spread has tightened by over 300(!) basis points since February this year. pic.twitter.com/EKTDjIzKhv

— jeroen blokland (@jsblokland) August 24, 2016

Debate has raged over whether Federal Reserve chair Janet Yellen, set to speak at the annual Economic Policy Symposium tomorrow in Jackson Hole Wyoming, will clear up any uncertainty regarding the bank's once ambitious belief of progressive hikes in the interest rate which has been halted by the emergence of economic distress outside its borders.

However as much as Fed officials try desperately to throw smokescreens in front of market participants by speaking of minatory prospects of interest rate hikes, markets aren't taking the bait and continue to drive developed nations yields further into negative territory.

The Fed realises that should it pursue further interest rate increases the gains obtained from those seeking out yield could ultimately gravitate into financial catastrophe leading many to believe the might of this trend will eventually forced the Fed to conform to the existing inclination on the part of other central banks such as Bank of Japan and the European Central Bank in feeding the market's mammoth appetite for stimulus and thus dismantling the possibility of normalisation in interest rates.  

Japan's economy proving policymakers wrong

It wasn't long before the Japanese economy proved contrast to policymakers belief  that exceptional stimulus measures coupled with an experimental and untested use of interest rates below zero are necessary means to break out of decades long stagnation and deflation with the latest printed figures indicating the nation's economic activity only grew 0.2%  in the second quarter of 2016, a paltry increase that's bound to pressure the government to deliver expectedly.

Having written about the topic of Japan on numerous occasions my opinion has yet to change regarding the type of policies employed by both monetary and fiscal authorities who have failed to drive the economic progression towards a better outcome.

In recent weeks we heard a bold but skeptical plan hatched by Japanese prime minister Shinzo Abe to expand his government's budget in an effort to support the economy, a frequent past time that's featured more distinctly as evidence clearly points to policy failure having promised to save Japan from economic implosion.

Japan's economy stalls in April-June, casts doubts on Abe's policies https://t.co/AIGc6FpAlG

— Jennifer Ablan (@jennablan) August 15, 2016

His partner in crime Haruhiko Kuroda hasn't had luck either in convincing buyers in the Japanese Yen of the overstated strength they've poured into the currency in the last year. The devastating impact this is having on the country's export clearly shows up with relenting desire to derail future prospects.

However no confidence can be found when the actions of the Bank of Japan imitate that of its counterparts and vice versa with a "follow the leader" mentality attached closely with every desperate measure taken by developed world economies in a bid to save themselves. Actions which are spurring on fresh currency wars amongst each other.

If the scale of stimulus were to be increased to a larger amount than what we're witnessing currently we are certain of financial catastrophe that would overshadow the haunted past and when considering the extent to which policymakers are willing to extend monetary programs, the ease of which to reach this state is not out of grasp.

Once again it cannot be stressed enough that world leaders need to come to the realisation that the global economy doesn't require infinite amounts of money supply to move the dial but a closer look into the shifting dynamics that are having a greater effect on the economic cogs that motion the mechanisms of growth

Is Kuroda trying desperately to stall the onset of "Helicopter Money"?

Although much anticipation had been built into today's announcement from Bank of Japan governor Haruhiko Kuroda to deliver an extra boost of stimulus it wasn't to be. Needless to say Kuroda spun a new surprise on the market by stating the central bank is placing the current stimulus program under review with research into the impacts it's having on the Japanese economy.

The announcement might have not thrown the right punches but it does indicate the BOJ is contemplating the use of "helicopter money" which so many expect to be the next policy to be introduced.

Just last week Kuroda had told a journalist in a radio interview that the possibilities and need for "helicopter money" was not necessary and couldn't provide Japan's economy with the requirements to meet its economic goals.

However the markets reaction to his statements told a different story following previous statements made by Kuroda where he had shared the bank's opinion and sentiment concerning the implementation of policy measures skewed largely to the side of pessimism to the markets view whilst abrupting changing his tone not long afterwards by implementing what the market had expected while wreaking havoc in financial markets.

It's this kind of action that leaves market participants with little space to verify the authenticity of central bankers integrity to communicate honestly regarding matters of the economy whether they be prosperous or grave. The crucialness of this is only being seen now with the consistent to and fro motion of indecision as well as the indulgent back pedalling from policymakers when making an endeavouring effort to step away from supporting their economies that have become somewhat comparable to a mischievous child ignoring his parents instructions.

A lack of boundaries during childhood can lead to a problematic outlook later on in life which is certainly what many feel is inevitably happening amongst the developed world's economies with little confidence to say the least. The problem is once you've fallen back on a decision there's little stopping you from doing whatever it is you shouldn't be which is why the notion of "helicopter money" is no a last resort but a necessary evil that merely shifts the extremism of global monetary policy just that much further away from rationality.

"...the BOJ is running into operational challenges as the Kuroda era of massive stimulus wears on". https://t.co/t2zHU1bk5k via @business

— David Kudla (@David_Kudla) July 29, 2016

Are the markets as "resilient" as Draghi says?

ECB's president Mario Draghi struck a soft tone when talking about the impacts of Brexit yesterday saying the central bank was of the view that financial markets had acted "resilient" in the face of incredible headwinds created by it but conceded the bank could only tell of the real damage at its next meeting to be held in September. Draghi reiterated that he was ready and able to use all the instruments available to him to ward off disruptions created by the event.

The irony of this comes in the article I posted yesterday surrounding comments made by Bank of Japan governor Haruhiko Kuroda where he explicitly told a radio interviewer that the probabilities of floating the concept of "helicopter money" weren't possible and needed to revive Japan's sagging economy.

Inasmuch as I'm of the belief that measures such as these merely make a small problem even bigger, there's no hiding from the fact it's created the situation we deal with at the moment.

ECB in wait-and-see mode after Brexit vote, says Mario Draghi https://t.co/r3ZpvLhmpe

— Telegraph Business (@telebusiness) July 22, 2016

Markets didn't rally after Brexit because they thought the prospects of a separation between the United Kingdom and the European Union would bring about a stronger outcome, they did so based on the expectation of central banks natural inclination towards reverting to stimulus measures when the sad state of the global economy peeks through the cracks of policymakers rhetoric.

If this be the case then Draghi's comments regarding the "resilient" spirit of financial markets after Brexit cannot be taken at face value but in the context with the action that's driving valuation higher than they should be, the very policy he advocates as a measure to unshackle deflation that's arrested economic growth in the region but with little evidence to prove effectiveness.

A frighten trend of monetary policymakers following in the footstep of their bureacratic government counterparts of choosing to ignore the problem long enough to think it'll disappear only to be shaken awake when crisis hits is a reminder that those in charge don't necessarily possess the right solutions to the problem.

Kuroda's comments emphasizes the markets addiction to QE

As much as I oppose the thought of more deviant ways to stimulate the world economy with "free"money, the coyness of Bank of Japan governor Haruhiko Kuroda in a recent radio interview with BBC 4 is quite comical to say the least. This after the market perceived the central bank to evoke the use of Helicopter Money in an effort to purge the Japanese economy of deflation.

The market drew even more inference in its arrival when former US Federal Reserve Chairman Ben Bernanke made a visited to Japan a week and a half ago in a meeting with Japanese economic policymakers over possible ways of reviving its economy with alternative tools. Bernanke is a strong proponent of helicopter money so the link between the two inevitably matched up and got market participants racing to splash out on speculative assumptions.

We've seen a resurgence of buyers on the market following the British referendum which many had thought would devastate financial market stability yet has left many baffled when staring at new all time highs being registered in US markets as well as the buoyancy of global indices to erase all losses incurred two days after the results of Brexit.  

Bank of #Japan's Kuroda rules out 'helicopter money' https://t.co/qRusUlrvKw

— Pedro da Costa (@pdacosta) July 21, 2016

A close affinity by market participants to the use of quantitative easing methods to abate consequential risks leaning on the global economy have become so intertwined that any inkling of its continuation sends markets into a overdrive to get its hands on the most freely available assets with returns attached to it.

Sooner or later this hocus pocus will end but policymakers aren't committed to put an end to the extreme out of fear of collapsing an already fragile system built up artificially over the past eight years. When the realisation sinks in that the world doesn't require to be flooded out with hordes of money piles but instead a restructured approach to dealing with evolutionary economic problems, the damage done will be insurmountable and a need to start from the bottom up begun.

Driving market valuations upwards with money that has no cost suspends the decision making action that evolves out of borrowing money. It also has the quality of distorting the picture or outlook of the world economy due to its overpowering nature to secure returns instead of finding alternative asset classes to be placed in. Any asset that yields return is being flooded with "free" money to the detriment of the global financial system, a fate we'll only see when it finally gives up the falseness of the situation.  

Can we imply further NIRP if the BoE lowers rates?

Just as the United Kingdom received a new prime minister yesterday in Theresa May's appointment to Britain's political hot seat, focus now shifts to the Bank of England's interest rate decision with pundits expecting BoE governor Mark Carney to drop rates for the first time in seven years.

At first glance it appears the decision will be made as a reactionary measure following the developments concerning Brexit which probably holds the greatest weight in the argument to edge rates to all time lows. Needless to say it can also be seen as a coercive coordination in responding to the re-instituted quantitative stimulus by its developed nation counterparts such as the European Central Bank and the Bank of Japan.

It's prudent to be reminded that although interest rates in the UK currently sits at all time lows of 0.5%, the central bank has an arsenal of monetary tools its able to enact to fight off dangers to the economy. It briefly paused its bond buying program in 2012 when other banks opted to continue and still extensively rely upon it but to no avail.

In the past four years the BoE has resisted the temptation to restart these programs however we need to question the British economy's capability in shielding itself from additional bond purchases that's ridden the strength of the British Pound since 2012 when stimulus was paused and in the light of the drastic economic upset from the Brexit vote to leave the European Union.

If the strength with which the British economy boldly defended its monetary policy stance has been wounded badly by the future outlook, then it brings into question the validity over the distorted might of the US economy that's hardly churned out economic growth sufficient to create waves in the global economy. It would suggest that it too is susceptible to becoming influenced by its fellow central bank counterparts exploring the riskiness of negative interest rate policy.

The BoE's decision will impact the global financial system more than simply the confines of its own economy with an action of lowering rates placing pressure on the US Federal Reserve in defending its case of normalisation of interest rates and in saying this implicitly suggest that its influence of directing world economic policy has been tremendously harmed.    

BOE set to cut rates for the first time in 7 years on Brexit backlash - MarketWatch https://t.co/MW7uuokkhN

— Rod McAlpine (@Rod1015) July 14, 2016

Why gold will continue its impressive rally as the world economy falters

One of the best performing asset classes this year has to be Gold and with the global economic environment faltering at every step of the way its not surprising so many analysts are predicting a resilience in price over the next year given the outlook.

Although the receding nature of its price performance since reaching an all time high of $1911.60 in late 2011, the renewed ambitions of gold bulls has been sparked once more in the face of crisis with an impressive rally of over 30% gain year to date.

Bias in the yellow metal is further boosted by the troublesome position world central bankers find themselves in trying to reignite the embers of inflation that's dogged developed world economies for some time after the onset of the Financial Crisis in 2008.

Their collective efforts thus far have yet to yield the desired outcome most expected by world leaders who had envisioned a stronger foothold on their respective economies after a spiralling crisis had drained all decency from the pool of conventional policy that had been trusted for all these years. What they hadn't bargained on was the extensive use of monetary policy whilst ignoring the calamitous state of government debts would eventually uncouple artificialness from reality.

The first signs of trouble brewing came when China's economy failed to buoyantly recover from a slump in economic activity causing shockwaves throughout the global financial system, however if the expediency of "easy money" had truly done the trick to fix what had been broken then there was no need for alarm or so that's what politicians fronted.

Evidence began to show the world economy wasn't able and strong enough to withstand a contractionary event that occurred at a time when central banks hadn't even begun to consider lifting interest rates from their lowly existence.  

Investors just keep piling into #gold - https://t.co/1coWuCiUpa pic.twitter.com/iFMZ8d3y6t

— Thomas Biesheuvel (@tbiesheuvel) July 7, 2016

Momentum quickly drove up the possibilities of using negative interest rates as a tool that had only been implemented in smaller, open and more liberal countries such as Switzerland, Finland and Norway. It should be stressed that the positive effects from using such measure hadn't been recorded at the time when other larger economies decided to do the same.

Japan and the European Union have effectively become the poster boys for the policy with sentiment built in those regions leaning towards that thought with the US Federal Reserve being the only developed nation committed to normalisation of interest rates but as it turns out the pressure is mounting on them to reverse an initial decision to begin lifting and join the fray of sinking interest rates.

In the time before we reached this point, the market saw signs of the central banks stimulating their economies as a positive, now the opposite is true. The more stimulus measures are put in place the less convinced participants are becoming over the relevance of such event and more concerned about the ill consequences they will have which is why the sudden rush to gold.

The longer central banks hold off triggering off the inevitable and making governments more accountable for their policy inaction the more likely the demand for gold will rise because the market is becoming fearful that the usefulness of monetary policy has worn so thin that any further efforts will simply hold no weight in pushing things forward.  

Major currency volatility is feeding from the sentiment of political uncertainty

Brexit might be fear-mongering the British public into the possibilities of a Eurozone without the participation of the UK, it's also stirring up a lot more than fierce debate over the strengths and weaknesses of remaining in the EU with market players beginning to look further than the June 23rd referendum date set down for voting to take place.

The pound has suffered dearly as a result of news flow pointing to the nation going either way when it comes to vote day, sowing the seeds of public discord amongst voters, not the ideal situation UK Prime Minister David Cameron would like to be in facing a possible party backlash should the vote favour heading to the exit door. Such a strong disagreement over the course of action the government should take doesn't make it easier for the Conservative Party after such vote has taken place with many expected to become disgruntled at the outcome whichever way it goes.

Added to this is the US presidential election set to take place in November of this year which itself is beginning to be drawn into the outlook of political uncertainty that has taken hold of global risk sentiment with some saying that it's creating a fluctuating pool of volatility in currency markets.

Part of the reason we seeing stark movements in currency valuations stems from the continuation by some in developed nation economies to extend its expansionary monetary programs through its central bankers causing a tsunami of liquidity that's finding it difficult to secure a home for investment and return.

Top currency traders warn White House race may echo Brexit chaos https://t.co/XNVLqqz5zP via @rachelevans_ny pic.twitter.com/p1hEiU0swB

— Bloomberg Markets (@markets) May 16, 2016

Both Europe and Japan have joined a number of crippled nation's suffering from appreciative valuations in their domestic currencies, dissuading foreign buyers from purchasing goods and services that contribute significantly to economic activity. The plan of action has been to venture interest rates into negative territory, a first for the world which hasn't been taken too kindly at its implementation.

Japan has been the most aggressive in stepping up its approach yet the desired effects that the BOJ would like to have seen come out of the situation has taken a turn for the worst with the Yen drastically strengthening as the placement of savings abroad no longer meet the prime objective of investment, which is to seek return. Japanese investors are starting to see their little returns made outside its border erode as its counterpart nations follow a similar monetary policy path, causing a mammoth inflow of Yen back into Japan.

The implication of such action has led to the Japanese Finance Ministry threatening intervention in the currency market if the appreciation doesn't stop. This obviously raised the hairs on the back of the necks of its fellow foreign finance ministers who feel that such a move would evoke the start of fresh currency wars.

Japan's Taro Aso repeats explicit threat of yen-selling intervention https://t.co/BDWPmwOSDv via @Reuters pic.twitter.com/ldhcTwILMy

— Dan Popescu (@PopescuCo) May 10, 2016

US Treasury Secretary Jack Lew reiterated that participating in overzealous currency devaluation would only help weaken the world economy instead of fulfilling each nation's self-serving currency goals. This was said in the light of Japan's finance minister Taro Aso edging closer to starting the process of currency intervention and ahead of the G7 summit taking place in Japan in just under two weeks.

It certainly sets the tone for what will be interesting discussions that will likely create a stalemate in terms of agreement around how world leaders will direct the economy in the right way. It's this uncertainty created by indecision that could heighten currency volatility further with the need to find common ground becoming the bone of contention.

Dollar struggles after U.S. Treasury secretary’s comments on currency wars https://t.co/HeKUPdMnFW

— MarketWatch (@MarketWatch) May 16, 2016

How the relationship between Bonds and Gold casts a shadow on world prospects?

Central bankers attempts to smooth over a bumpy economic recovery has taken a new turn following the auction of long term bonds by Portugal, Spain, France and Belgium issuing debt securities with maturities of between 30-50 years in a bid to take advantage of the negative interest rate environment currently being meted out worldwide by many developed world economies.

A staggering $9 Trillion worth of bonds worldwide presently sits at yields below zero, a first for many in the financial industry in an experimental usage of negative interest rates in the hope that it would bring some life back to economies that are suffering from deflation and low economic growth.

Yet experts have warned central bankers that the flaws of implementing such extreme policy could have a dire effect on the outlook of the world economy for decades if the incorrect approach is not taken from government's in restructuring their economies after being afforded ample amount of time to do so, instead choosing to feed the social welfare addiction of its voters to continue flaming their own political greed.

Hindsight would suggest that extending the maturity of long term bonds adds an element of risk when purchasing these bonds which pushes the yield threshold above zero and into positive territory, a once fixed convention that never flirted with any hints of diverging to the pathway we've found ourselves on. The demand for these securities has attracted a substantial amount of attention from analyst who seemingly label this as investors last ditch effort to get their hands on favourably yields.

It's also indicative of the bond markets expectations that central bankers will continue to loosen their grip on monetary policy going forward with no signs of differing views from decision makers. When will the realisation sink in that the fantasy the world has been living in for the past eight years is slowly waking the dreamer by invoking the most terrible of nightmares?  

Investors Fleeing $9 Trillion of Negative Yields Fuel Bond Binge https://t.co/AWsW5OgZzd pic.twitter.com/2RrHsOSsgT

— Quinton Mendes (@CadeTradeR) May 12, 2016

We've heard controversy stir up when protestation was aimed at the ECB for taking the decision to scrap the €500 note, saying it made money laundering easier for criminals. Many haven't bought into this excuse with some saying the central bank wants to eliminate the use of physical cash so it can have greater control over the money flowing in and out of bank accounts, eventually forcing people to allocate their savings into assets or inadvertently spend it.

We also saw the Bank of Japan reporting that the demand for the highest denomination note ¥10 000 has surged by 6.9% year on year after the introductions of negative interest rates.

This points to the Japanese public opting to hold their savings in physical cash rather than be penalised for keeping it in the bank where it should supposedly be earning interest! Besides this fact, it would furnish an opportunity for a far lesser burdensome method of storing wealth to be utilized. That particular method which has stood the test of time is Gold...

A possible reason why we've seen the resurgence in the yellow metal is because investors feel that central bankers, being the last true saviours of the world economy, have depleted their ability to control the outcome and are scraping the bottom of the barrel for bamboozling solutions. As time bides the inevitable, the risks grow larger everyday with each passing day bringing forth new evidence of the extent of the contagion.

Making things easier and safer for investors to buy gold than was the case only a few years ago is the creation of exchange traded funds which actively buys and sells gold, storing it in vaults for safekeeping which represented most of the weight in demand. Delving further into the matter, one wouldn't be naive to miss the fact that demand from India and China, the largest consumers of Gold in the world, has shrunken due to a strike by jewelers in the former nation and a slowdown in the economy with the latter.

Yet the demand for Gold has still increased with the price registering a gain of 16% this quarter, the second highest on record since 2000. Moves on a scale like this don't blow into the market by chance, they form when there's a sentiment change which is exactly what's happening right now. The tornado may be blowing in but the storm chasers aren't riding until they can get close enough, a thought to ponder over when you consider how close we really are to the edge.

Gold demand surged to the second-highest ever in Q1: World Gold Council https://t.co/ozGCem0eTH pic.twitter.com/tqdonxjx87 MT @EdVanDerWalt

— BN Commodities (@BNCommodities) May 12, 2016

Focus turns to central bankers to qualm uncertainty

Markets have been edgy this week with much of the movement stemming from currency pairs as developed world's central banks and economies took centre stage as risk begins to build up. Most notably was the Japanese Yen's remarkable appreciation against all of its major peers with the government attempting qualm bullish optimism by saying it was ready to intervene in the market at any given time.

The abrupt appreciation of the Yen flies in the face of policymakers at the Bank of Japan who have tried but failed in their attempts to depreciate the currency with extremist monetary policy that's seemingly had an inverse impact.

We also saw shakiness in the Euro as a number of issues take strain on the economic bloc. The ECB came out reassuring the market of it's willingness to up its ante if the stimulus measure currently in place failed to produce the desired outcome market participants had been expecting.

Apart from the monetary woes weighing heavily on the Eurozone, political scandals are not afar with leaked transcripts of conversation between IMF officials providing impetus to believe that negotiations surrounding a renewed bail out deal with Greece and the Troika is set to display the same indecisiveness produced at the beginning of last year.

Notwithstanding this, the worry that the Brexit referendum vote will need more convincing than once thought adding further complexity to matter within the region with the date of both aforementioned issues falling within a tight schedule that wouldn't allow policymakers to give enough attention to each.

It was the turn of Fed Chair Janet Yellen to face the scrutiny of the market's nervousness after she sat on a panel with former Federal Reserve Chairman Paul Volcker, Alan Greenspan and Ben Bernanke discussing the state of the US economy as well as the direction of monetary policy around the globe. Yellen said she did not believe that the US economy had formed a bubble and there were no risks of a burst either. This after presidential candidate Donald Trump made remarks that the US economy could be on the brink of implosion at anytime.

Evidence is pointing to the market becoming unsettled and the lack of response to central bankers dovish tones  is spelling danger for the weeks that lie ahead. The focal point around major central bankers of the world happens as the backdrop of political uncertainty takes hold of fears however this time the once turned to financial superheroes of yesteryear are tripping up over their own powers to save the world economy from it's inevitable fate.

It's been a rocky week for the $5.3 trillion-a-day forex market https://t.co/Uz3hFWDqG4 pic.twitter.com/N23tksqJ3I

— Bloomberg (@business) April 8, 2016

Discussing it earlier this week in Travelling Technicals I had said that the New Zealand NZX 50 Index looked to be the best looking technical chart I've done analysis on so far this year and it proved the best performing index this year amongst its developed market peers.

The reasoning could lie in the fact that New Zealand's economy operates with a wide exposure to agricultural production which probably gives a clue to the performance. In the article below its said that the lack of foreign investment and defensive stock all played its part in helping lift the index. If this were the case it could possibly be one of the first indications that investors are starting to channel their capital towards defensive plays as they expecting a world recession.

New Zealand is a rare case of a developed market that's posting gains this year https://t.co/JDp7BT4ixs pic.twitter.com/Gv1Jm42Xwh

— Bloomberg (@business) April 8, 2016

Is the ECB running scared after today's comments?

Questions still remain whether the decision made by the European Central Bank was the right choice in adding extra stimulus to its already extensive arsenal in the hopes of bumping up inflation above the all important 2% mark which so far has failed to win over critics. Apart from having to contest with both internal and external shocks that play a massive role in influencing the inflation rate, the ECB has now found itself drawn into a new debate over the usage negative interest rates.

The message that came out of the ECB this morning is a reactive one where the central bank is trying to revive the hope that a stock market rally might pursue if they talk it up enough. This is hardly the case as new uncertainty arises from the profit prospects of the banking industry following another interest cut that takes things deeper into negative territory prompting banking executives to re-think their strategies going forward.

After Mario Draghi's announcement last month I commented in my blog that markets have become fearful of the ability of central banks to steer the global economy in the right direction. We heard grim projections of the state of the European economy that increased fears rather than abate them leading to market participant to reassess their views on the current market environment.

Norm would suggest that markets should've come alive after such an expansive stimulus program yet it didn't and instead fell flat on the ground leading many to believe that perhaps monetary policy has reach an exhaustive end.

ECB stresses it's ready to do "whatever is needed" to return inflation to target https://t.co/ixShYT2hkL pic.twitter.com/HqMmFQH06h

— Bloomberg (@business) April 7, 2016

If wanting evidence that would backup the belief you'd only need to look over the Asian continent to Japan and witness the unforgiving onslaught traders and investors have brought onto the stock market fearing the once hopeful policies proposed by Prime Minister Shinzo Abe amusingly known as Abenomics maybe setting up a dramatic tragedy to end the tale.

With government debt ballooning out of proportion and credit rating agencies closing in on investment grades by warning that the levels we're seeing currently aren't sustainable, now would be a good time to exhibit the good that may have come out of such measures after almost 4 years of progress. But the Japanese economy has nothing to show for it besides piles of debt and an overheating stock market spurred on by the Bank of Japan.

Foreign investors have taken exception to the shifting ground below their feet and decidedly made a spectacular dash for the exit sign as things get worse. There's an old saying that goes "The proof of the pudding is in the eating" and unfortunately Abe hasn't delivered on his promises. Adding further to the woes is the BOJ's action of supporting equity markets and placing a blur of valuations making the risk of a collapse so much closer.

It's clear that monetary policymakers are running out of options at an alarming rate which would explain the uncertainty that's lying around global markets at the moment. The more they struggle to find endless solutions to perpetual problems the clearer it becomes that the time for governments to get to grips with the reality on the ground and focus on the restructuring of their respective economies is coming soon.

 My only distress is how much disorder has been created by taking the extreme this far?

"Buy my Abenomics"? Hedge fund says nope https://t.co/ixihLhwVdz via @ynakamura56 #JPY pic.twitter.com/RJy9kSctOu

— Sarah McDonald (@mcdonaldsarahj) April 7, 2016

Yellen's dovish comments spells over optimism to hike rates by Fed officials

You would think that the hype built around the anticipated interest rate hike the market had been expecting from the Federal Reserve in almost ten years that consequently caused the US Dollar to strengthen way beyond thought would've provided certainty to markets but instead has brought on more worry and concerned that's fuelled the flames of unpredictability.

This after Fed Chair Janet Yellen spoke at the Economic Club of New York yesterday during a speech striking a more dovish tone than most had expected.

The problematic situation the Fed finds itself in at present falls squarely on the fact that it had delayed the process of the inevitable interest rate hike and fallen into the trap of leaving it too late by implementing constrained policy in times of great distress throughout the world. Things become worse when you look over the oceans to neighbours Europe and Japan who both initiated negative interest rates due to unresponsive economic activity.

Divergence between policy direction amongst developed economies suggests a decoupling of a common agenda to drive world growth in harmonious tandem. The Fed has committed itself to the normalisation process whereas other central bankers have opted to continuing pushing the extremes of monetary policy stimulus. This effectively deems the Fed's current stance void of any chance at succeeding as alignment has become a frequent feature in deciphering the types of measures used to revive or pull brakes an economy.

Janet Yellen's comments that the Fed is looking to "gradually"lift rates to a reasonable pace are signs that the decisiveness that once stood firm at the central bank is beginning to shake with doubtfulness over whether the current view of tightening policy is the correct decision and perhaps an indication that the over optimistic nature of FOMC members may have created expectation that the US economy could fend off more than one interest rate hike.

However its a double edge sword because the more the Fed holds off on hiking rates the more concerned the market gets as the bleakness simply reaffirms the calamitous outlook many are believing to occur.

Yellen's super dovishness creates confusion https://t.co/EC855KAhaT pic.twitter.com/sehG11jN9V

— CNBC International (@CNBCi) March 30, 2016

In fairness to Miss Yellen, the normalisation process cannot be seen as an ordinary event that takes place during the normal course of economic activity. The situation the world's found itself in is not ordinary and the measures applied so far highlight the extent policymakers have gone too to prevent the worse financial devastation since the Great Depression.

My greatest fear at the moment is it may be too late in the game for radical policy shifts from world governments that have been called for from many corners of the economy and as a result of the inaction a new economic catastrophe may emerge. If this were to happen there would be considerable less room for governments to fix the problem and even less leverage from exhaustive monetary policies.

This allows for very little maneuvering space to be flexible and would force politicians to finally confront the structural issues their economies having been facing for a number of years that keep getting delayed due to unpopularity amongst ordinary citizens. The unfortunate truth is you cannot reap the benefits of the system for which you haven't laid an ounce of work towards and the reality is going to come down particularly hard on those who have found commonplace in these conditions.

Observing the rhetoric from key figure in the central bank world would suggest that the tone once used to bring excitement back into the mixed is starting to wear thin with critical examples of that coming from the ECB and BOJ. Added stimulus measures have yet to drive markets forward with the latest statement by Yellen being the bone of contention between those who believe monetary policy still has the ability to add kick to the economy and those who believe the clock is ticking towards the next economic implosion.

Whether the latter or the former proves true will form the importance of our assessment of markets over the next month with much attention needed to be pointed in the direction of riskier assets and their ability to produce returns they've failed to generate thus far this year.

What Credit Suisse losses say about the fate of the banking sector

After 9 months as the new head of Credit Suisse, Tidjane Thiam has made a frightening concession surrounding his oversight of the company by indicating that traders within the firm had ramped up their positions of illiquid and distressed debt holdings without the knowledge of their seniors going as far to say that even he had no knowledge that such activity was happening right under his nose.

This comes as the banking firm looks set to report another quarter of losses following a dismal previous quarter where Thiam announced a major restructuring program that aimed to trim off fat and focus the company in the direction of wealth management.

Following these new revelations Thiam looks set to deepen his restructuring program by cutting more costs one of which proposes an additional 2000 jobs cuts on top of the planned 4000 taking the the tally to 6000. One does get a sense of eeriness when a CEO of a major financial institution makes such statements that you begin to wonder if banks may be headed for troubled times.

The reason for such thinking is supported by the fact that the dawn of negative interest rates has beckoned on many in the financial system to re-think or adjust their strategies so as to align the current interest rate environment with that of a profitable financial institution business model. However having never experienced a situation where interest rates are below zero there's no common theory to apply their minds too that would aid these financial houses of the appropriate measures needed to be taken.

What Thiam has revealed is precisely what we will see coming through from other major banking firms as the months pass and the effects of negative interest rates take their full toll on the economy.

Credit Suisse CEO says traders ramped up distressed debt holdings without his knowledge https://t.co/KUbTFzvudq pic.twitter.com/LPxhRzTYMw

— Bloomberg TV (@BloombergTV) March 24, 2016

Conventional thinking would suggest that for a bank to make money it needs to make loans available to those who require the funds. In return the bank receives interest which contributes to the profitability of the business. However banks are now burdened with the reality of receiving no interest for loans made available but instead pay the borrower to loan the money.

This can't be the case as the majority of  banks profits come from interest earned on loans which would decimate banks earnings. Banks have so far resisted this practice as it would mean that they would be entitled to charge depositors interest for having their money in the bank. This would lead to many depositors removing their savings from the bank thus shrinking the size of the potential loans that could be made available.

We can see from the above paragraphs that the landscape of banking has dramatically changed due to the onset of negative interest rates but it hasn't stopped shareholders of these companies expecting profitability. It's this exact point why we've seen a drive by management to attempt to seek out profits over and above what is considered the norm resulting in the business taking on more risk than would be necessary.

But as the global economy becomes a curveball of uncertainties nobody really knows when we'll see healthier economic times creating a financial storm of volatile proportions with just the right mix of fearfulness that triggers off the most violent financial market moves causing deep declines in asset valuations.

 Perhaps they could turn to the mainstay of good returns found in emerging markets but even their risk profiles have markedly increased over the past year following a bleak Chinese outlook that's left many uninspired, dejected and more so burdened by huge debt piles that require faster growth to pay them off yet not finding any joy in it.

It feels as if the financial market space is becoming claustrophobic with avenues of return wearing thin as the benchmark rate of return in the economy drops below zero and further downwards. This circus will only end when policymakers realise what the error of their judgement is causing and feel the urgency of shifting the extremity away from the edge and bring normality back into existence. Until then the world financial system will walk a tightrope in the hope that logic eventually prevails but hopefully by then it isn't too late.

Travelling Technicals with Global Indices: Nikkei 225

Among the world's top stock markets as measured by market capitalisation is the Tokyo Stock Exchange with 2292 listings, it certainly lives up to its hierarchical standing with plentiful multinational corporations having all started in Japan and expanded outwards, conquering new business landscapes and winning over global consumers with products that has seen them become some of the most trusted, reliable and technological brands of our time.

It's not difficult to understand why the Nikkei 225 has formed part of a common index following throughout the world. If one thinks of just a select few companies that can be found in their day to day lives that reside in the index you sense that they are the appropriate gauge for world economic outlook;

• Toyota
• Nissan
• Sony 
• Fujitsu
• Panasonic 
• Komatsu 
• Yamaha 

It's evident to see how Japanese products have influenced the way the global consumer utilises their purchases and in saying that has set the benchmark in terms of standard of quality that should be expected.

But as much as the Japanese businesses have successfully captured profits from their export endeavours, the pathway with which the Japanese economy is along has been troubled for the past two decades with a risk of continuing to deteriorate if long term solutions aren't found to pressing issues. One particular dilemma facing the Japanese is a crisis of having a shrinking population or put more plainly a situation where there are more old people than young people.

As a result the Japanese government is finding it extremely hard to tap into revenue sources that would produce sufficient taxation to fund an increasingly demanding fiscal budget that requires more priority on the health of the elderly and as such needs to tackle restructuring their economic activity that would be prosperous over the long term. Thus far that goal looks too distant for many to begin being hopeful of the future yet with every passing year the need to deliver is growing ever constant.

This is just one of the many problems facing the Asian nation but makes a worthy case study for other developed economies to pay attention too. We've seen parallel policy implementation when it comes to a monetary easing between the Bank of Japan and the European Central Bank which is seemingly causing the world to ponder what trajectory both these nations are on.

However because the generous helping of monetary easing has made the need to find suitable returns ever greater the Nikkei 225 index has seen a dollop of resilience coming through that's assisted the index to challenge long term resistance with potential to go higher.

Let's get down to the charts:

Quarterly

The chart we looking at has a considerable length of time spanning as far back as 1987 which would date the preceding rally before the asset price burst that has held financial markets back in Japan for over two decades. The highs made during the late 80's early 90s have never been registered again since the huge declines that sent it into a secular downtrend. 

That downtrend was completed in 2005 with an initial break out producing a good rally but falling short of the resistance level needed to see a resurgence of buyers joining the trend upwards. It seems as if the trouble started around the same time as the Financial Crisis and sent prices back down to the lows of 2003/04. But surprisingly prices were able to hold support steady without plunging further which would have reaffirmed the continuation of the downtrend. 

Prices remained subdued after the shock of the Financial Crisis which is something I found unfamiliar compared to other major indices that registered fresh lows then made a courageous effort to reach for the highs last seen at the peak. In this case there seemed to lack directional movement which would suggest a disconnect between this index and other major indices. 

In came Abenomics together with the BOJ on a crusade to rid Japan of the evils of deflation by putting together a string of stimulus measures that helped get the index moving once more in sight of the overhead resistance that had yet to be broken. 

However it must be mentioned again that another disconnect became known and that happened between the Japanese GDP growth rate and the Nikkei 225. Where the GDP growth delivered far below par performance, the Nikkei continued its flight to the top which begs the question, who's buying into the Japanese recovery story? 

It turns out that the amount of bonds available for the BOJ to buy isn't sufficient enough so Governor Haruhiko Kuroda found it necessary to buy Japanese equity ETFs that has caused the BOJ to own roughly 50% of all equity ETFs listed on Japan's stock market. 

Back to the aspects of the chart and we see that the resistance around 18 000 has been broken but subsequently fallen back below that level which shifts the risk into the hands of the buyers. If we assess the overall price action that has taken shape over the last 15 years it resembles that of a double bottom formation suggesting that we could've found a solid bottom. With the price having broken upwards activating this pattern with big potential. 

But with the price hovering below 18 000 it does leave traders a little skittish over the prospects of going higher. A general rule of thumb would be to say if the price were to close below 14 000 (roughly half the measured move) it would nullify the pattern. We saw a dramatic drop in the first quarter of this year but a strong bounce shows that buyers have strong interest at those levels.     

Weekly

The uptrend we spoke about earlier on is seen clearly on the weekly chart with a distinct topping pattern having formed, the Cup and Handle with a break to the downside. The progress of the move indicates that we've reached a level that hasn't satisfied the full target of the move which means there could be further downside before we see any resolve of the price.

Two scenarios could enact themselves in reaching the final target price that lies just below 14 000, a level we established to be critical in previous paragraphs. Either the price falls to reach the target and bounces strongly back to shield it from anymore technical damage or the price falls below 14 000 and becomes stuck underneath nullifying the quarterly Double Bottom pattern which would be a real nuisance had you been following it for the past 15 years!!!

Current market conditions don't bode well for a bullish case in this situation so it should be accepted that the bias lies to the downside however if the BOJ were to up its stimulus measure we could see a strong rally pursue but this is becoming unlikely with the markets sentiment around the use of such measures being frowned upon.

Markets become fearful that Central Bankers aren't in control anymore

Yesterday I went into detail over the speculative move by the ECB to stimulate the European economy and said that Mario Draghi had a number of considerations to think about before answering questions after the announcement was made. We saw markets initial reaction quite buoyant with most European indices making a dash for the highs of the day but only to take a steep plunge once Draghi got talking.

The market somehow didn't appreciate Draghi expressing his belief that there was no longer a requirement to lower interest rates further, implying participants shouldn't expect additional measures to be put in place anytime soon. Considering the wave of stimulus the ECB added to existing measures, its understandable why such a statement like that was made yet it still didn't give the market impetus to set forth on a rally.

Perhaps the bleak economic forecasts made during yesterday's announcement gave a heads up to investors that the central bank didn't expect an improvement soon and it was implicitly introducing additional measures to avoid calamity. The sentiment shown during the ECB press conference exudes an incurring fear that maybe central bankers don't have control over the direction of the economy and negative interest rates spell disaster.

Embed from Getty Images

So no matter what course of action is taken the market will use such an event to sell off exposure instead of creating euphoric rallies that last for months on end. This was clearly evident a few weeks back when the Bank of Japan lowered interest rates to below zero for the first time in its history. Again the first reaction to this was positive as has been the case when stimulus is announced but then the market had second thoughts and dragged global markets lower.

What we witnessing here is a clear indication by markets that they no longer trust central bank's' ability to steer their economies in the right direction, partly the reason we've seen an amazing winning streak in gold lately but more importantly why stock markets around the world have taken a backseat while the focus has shifted to bonds.

I have said it in the past and will continue to emphasis the point that negative interest rates don't mend a broken economy. What is needed is structural reform from government's but this is becoming harder to come by as is becoming evident in the ECB decision to expand its instruments in use to corporate bonds due to the insufficient quantity available in EU government bonds. European governments have mounted up hordes of debt piles that has not only caused distress amongst credit rating agencies but severe austerity measures in place needed to cut back on the payment burden and shrinking tax base.

With government's forced to implement a contractionary fiscal policy which is in direct contrast to the expansive monetary policy set by the ECB you find defeating ends in the sense that one cancels the other out that looks to keep the EU locked in a mess for some time to come.

It's clear that policymakers have plunged worldwide markets into disarray following the waves of stimulus introduced after the onset of the Financial Crisis. What isn't certain at this point is how they are going to reverse the adverse impacts these effects are having on the sentiment of market participants and economies alike that could send an even bigger shock through the financial system than we saw in 2008. All I can say is fasten your seatbelts, we're in for a bumpy ride...

Mario Draghi throws the kitchen sink at Europe’s economic distress. Again. https://t.co/E4c0iXiwl7 pic.twitter.com/fQAjP0MwW7

— NYT Business (@nytimesbusiness) March 11, 2016