In the News Today

US Elections set for a tight race with Clinton tipped the favourite

Hardly anyone can say that the run up to this year's US Presidential Election hasn't lived up to the lively expectations it promised when candidates from both the Democratic and Republican parties started their campaigns months ago in a race to the White House with the contest reaching it's conclusive end heading into election day tomorrow.

But away from the low blows and side swipes handed to one another, come Wednesday after the results have been announced a victory celebration will be short lived as the real work begins in earnest with the inheritance of the current Obama Administration's issues of difficulty handed over to the next in line.  

Be it as it may the priority of the economy needs to take centre stage as the steadiness of the global outlook looks ever more uncertain in an environment of low to no inflation and negative interest rates coupled with lacklustre growth. The key for either Clinton or Trump will be a revival of confidence in the direction of the world economy which is largely influenced by the policy's set in the US.

How markets will react to the U.S. elections https://t.co/uaBUuzlRKy via @BV pic.twitter.com/e4XAA7xLQe

— Bloomberg (@business) November 7, 2016

Rejection of Chinese Deals raises doubts

As questions begin to mount over the benefits of globalisation, stats showing the rejection of proposed acquisitions of foreign companies by Chinese firms is headed for it's highest level since 2009 helping critics of the system point out another flaw in its uses as an economic regime amongst nations.

The most scrutinising nations include the United States and Germany whose policymakers both handed heavy blows to the aspiration of Chinese investors by stopping big deals dead in their tracks which could imply restrictive access to investing or a protection of sovereignity.

This chart shows the value of rejected Chinese acquisitions overseas https://t.co/f5gwa7BPcz pic.twitter.com/1zUGuHZid4

— Bloomberg (@business) November 7, 2016

Potential stockpile disruption could see oil prices spike

 A 5.0 earthquake in the town of Cushing, Oklahoma has pushed worries over the disruptions of oil supplies in the US as authorities attempt to verify the extent of the damaged caused near one of the world's largest oil storage facilities that has the potential to shut off thousands of gallons of fuel reaching end users.

However fears might be short lived as OPEC continues to battle infighting amongst its members heading into the second and final bi-annual meeting of 2016 due to be held at the end of November in which speculators had hoped would yield a positive outcome for the decline of oil production.

UPDATE: Fears of damage in Oklahoma after earthquake hits near one of world's key oil hubs https://t.co/xtqJEyWmO1 pic.twitter.com/Z7qZWePN8Q

— Bloomberg (@business) November 7, 2016

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.

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.  

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...

China isn't the only country in Asia

Part of the discussion surrounding the remarkable rebound in commodity prices this year has been the sustainability of these moves given the diminishing economic leverage of resource consuming China after woefully slumping back on its growth with more than expected intensity resulting in a lack of substance finding strength in the upward move.

The boom created in resources over the past two decades have largely stemmed from the massive infrastructure spend started by the Chinese government in transitioning its country's economic policy from an obsolete communism system into a one operating by the mechanisms of the free market.

China's transformation into an economic powerhouse has meant the spotlight not only being shone on its achievements but also on the scrutiny regarding continuity of this existing feat due to the scale of enormity attached to it.

In the last three years alone world leaders have grown ever more skeptical over China's ability to continue on its illustrious growing path when considering the latest and extensive overhauls policymakers have been introducing to the system in order to shield the nation from unwanted economic consequences such as debt traps.        

The world's biggest miner is looking beyond China for buyers https://t.co/kk4gVSpK6K pic.twitter.com/L00spSb5rQ

— Bloomberg Markets (@markets) August 19, 2016

Many global miners have been gutted by the development after initially following projections that indicated the demand for commodities would remain constant when peaked thus creating a reason to expand production capacity. Fast forward a few years later and these same miners are scrambling to consolidate their balance sheets by cutting back on burdensome debts and unprofitable operations in an effort to keep investors at bay.

However as the situation in China worsens commodity prices seem to get more resilient suggesting correlation between the two detaching with the latter branching into new forms demand to satisfy it's supply.

The pace of China's consumption of world resources has almost overshadow the other pockets of opportunity with India the likely front runner to overtake the Sleeping Giant as the new growth story. Unlike the remnants of conformity in China's economy, India has poorly functioning infrastructure and a disparaging wealth gap between the rich and the poor but bundles of potential when it comes to improving the lives of its people which numbers 1.3 billion!!!

Based solely on comparable populations, India could very easily compete at the same height as China once did.

Whilst drifting South of China we find countries who've laid in the wings for many years being easily overlooked due to size of their economies however when combining each nation's economic activity one is able to envision the scope of potential that could very well be where commodities find their demand.

As much as China's rise in the global economic ranks has yielded great strides in distributing the powers more fairly amongst the world one aspect has been forgotten. The enormous strides made by the Asian continent has translated into an ability to compete economically with the other continents such as Europe and the United States.    

Reflecting back a year after the PBOC Yuan devaluation

Calmness and confidence were the flavours of the day yesterday as the world used a moment of retrospection to remind itself of the events that happened a year ago when the People's Bank of China sudden devaluation of the Yuan marked the beginning of a financial volatility storm that blew away out of touch complacency and filled the air with fear.

Although the move helped bring about a correction in Chinese equity valuations that had drawn in so many deluded citizens hoping to cash in on the "never ending" stock craze casino, it hasn't driven it back enough for real investors to feel comfortable of a realistic outlook.

At the time I can recall making the suggestion that the weight of China in the global economic equation was truly felt by the shockwaves it sent throughout the world financial system that held it down for the next six months after it had happened. I still believe the day marked a point where China could no longer throw smokescreens in front of the market and expect it to go unnoticed.

The core of uncertainty emanated from the consistent interference from Chinese officials in various parts of the economy with many expecting such drastic action by the PBOC to imply greater intervention in the future. However the central bank must be applauded for staying its ground after realizing soon enough that such undertaking would tarnish the reputation of its fragile investment image that's suffered tremendously and possibly harm future prospects.

But the real test a year later is will they continue to abide by this stance of non-interference or will they take their chances and challenge the limitless might of the market as a whole?  

It's 9:16am in HK. Exactly a year ago, China devalued the yuan. Today's fixing 6.6255

Happy #Yuanniversary pic.twitter.com/nWB8k2v7AD

— David Ingles (@DavidInglesTV) August 11, 2016

Political risk back in the spotlight as possible bond default shocks

Arguably the strongest contender to make the biggest waves in financial markets in the second half of this year are negative yields on bonds which have gradually evolved from merely a concerned thought into a desperate situation described only by the panic acquisitions of similar instruments containing positive returns regardless of the risk attached to it that could very well overshadow the scale of catastrophe when compared to the Financial Crisis of 2008/09.

Late in July I wrote a piece about the rapid transmission of funds from bonds markets in the developed world in favour of fixed income securities in emerging markets that offer the very least of a positive yield. The reason being the protracted use of monetary stimulant in the form of negative interest rate policy in countries such as Japan, Switzerland and the European Union in bid to purge economic stagnancy setting in.

At the time I concluded the absence of rationality from investors when considering all risks embedded in an instrument was an alarming notion to contemplate yet the onset of such a view has already infected the current market sentiment with disastrous consequences.

A twig of sensibility should be heeded in the latest reports coming out of Mongolia where newly elected government officials have stated their intentions to avoid default on its country's debt at all costs. This after the Mongolian bond market saw a surge in demand for its fixed income securities from positive yield seekers finding refuge from the financial storm.    

Yield-seekers get reality check as Mongolia sounds alarm on economic crisis @natashadoff https://t.co/8ZPwmBW7SL pic.twitter.com/5iVYZaqBjz

— Emerging Markets (@BloombergEM) August 11, 2016

However they hadn't counted on an outcome such as this to occur which meant it sent shockwaves throughout the Mongolian financial market once it was heard. But surely how can one blame the prudence of government especially in times when austerity is needed? It's nonsensical.

The matter goes straight to back to what's been said earlier; the irrational investors as opposed to the norm of rationality has blurred the outlook of financial markets to such an extent that not all risks have been considered leaving investors vulnerable to being caught in sudden price changing events.

Political risks stemming from emerging markets have grown in frequency due to their interconnectivity with big brother China in reference to trade relations. The contraction of the Chinese economy has not only hardened the view of its citizens but also those who have suffered gravely as a result of a slump in trade with communist reforming nation.

Besides this, the economic outlook has shifted vastly from prosperity to despair translating directly into potential political shockwaves occurring from the dissatisfaction of citizens on its governments which isn't fully being accounted for in terms of risk. Mongolia might be the first but certainly won't be the last offering an inkling of what can progress if the issue of negative interest rate policy isn't addressed with true reflection of its impacts on the rest of the world.

A potential shakeup for the steel industry

Things seems to be heating up amongst global steelmakers following rumours of a potential merger between China's biggest producers in an effort to shore up the industry that's faced a barrage of attacks from its international competitors accusing the Chinese government of supporting the sector through loss making periods due to its mass employment generating ability.

China's steel industry is comprised of large to small scale producers, the bone of contention for some who say production is being encouraged regardless of the price of steel which by its own account remains under strain from the oversupply being exported onto the global market.

Although still rumours, if the information turns out to be true then it fully expresses the Chinese government's intentions of overhauling the steel industry to compete in a global market, an outcome that may give certainty to millions of Chinese steel workers but unsettle the dominance once had by major steel makers across the world who spent billions in capital expansion projects with the foresight of supplying the deficit of Chinese steel demand.  

With this in mind it's pertinent to note that these producers have tried to fight off China's inefficient producers with low cost margins from some of the most generous ore bodies in the world.

However a depleting price margin has meant the the cost needed to recover the capital spent in reaching this competitive advantage continues to escalate as the time required to pay it off extends further away from expectations with every decline in price.  

If China decides to go through with a consolidation of its steel industry then it'll continue to strangle the price of iron ore leading to more of the same...disequilibrium. Most major listed steel producers have barely survived the past three years of turmoil in the commodities markets that have brought on a vast amount of cash outflows from their balance sheets. China's restructuring will only serve to put more pressure on an industry already under strain.      

It's believed a sweeping overhaul of China's steel industry is being considered https://t.co/cILnKPxlC1 pic.twitter.com/ku1cO2gxiP

— Bloomberg (@business) August 1, 2016

The PBOC is speculated to be using intervention again

Last week I spoke about the ramifications of Brexit on the nature of global monetary policy going forward and said the Bank of England was poised to open its war chest of monetary tools to avert a deepening crisis in the British economy. I also said I thought a loosening stance from the BoE was likely to apply pressure on the US Federal Reserve regarding their divergent pledge to see interest rates normalised as opposed to its developed world counterparts such as Europe and Japan.

My assertiveness that this will indeed be the case was strengthened after it was reported the People's Bank of China may have intervened in the onshore currency market following an appreciation in the US Dollar which should've been offset by a devaluation in the Chinese Yuan with officials decidedly fixed the rate stronger.

The PBOC had steadied its hand with intervention when it abruptly devalued the local currency in the middle of last year causing shockwaves throughout the global financial system. After finding stability towards the beginning of this year it took the decision to allow market forces to dictate the direction of the price rather than set it itself.

Having followed this decision up until the Renminbi reached a six year low of 6.70 in the days gone by, its becoming abundantly clear that policymakers have reached an end of this resolution by observing the sudden appreciation of the local currency in an attempt to ward it away from this critical resistance.

Either the PBOC will be left to vehemently defend this level with all its might or it envisions a situation where the US economy is susceptible to economic headwinds that defer the Fed from raising rates as the global outlook remains bleak. Its own economy has yet to inspire forecasts that's turning the tide against the notion of a perpetual economic value generating machine.  

#Yuan rises most in a month as it looks like #PBOC may be defending 6.7: https://t.co/zTkiPB56w0 via @business pic.twitter.com/GQNxGI1bFQ

— Quinton Mendes (@CadeTradeR) July 20, 2016

China can no longer rely on debt to fuel growth

It's hard to believe a year has flown past since matters relating to an implosion of Chinese equity markets took a firm grip of the world's future outlook and sent global financial markets into overdrive over the spillover effects of such an event.

Although the full risks have yet to contaminate the world economy it must be said that the Chinese government has orchestrated the fixed smooth over of concerns many economists cited as persistent problems that threaten to reappear at a later stage.

One of these risks is the consistent additions to an ever growing debt pile used to spur economic activity that's seemingly wearing thin in its appropriateness as a tool to stimulate growth. The current situation in which consumers and producers have burdened themselves up with debt is weighing heavily on their ability to transform income into a value chain.

The taxing demand interest repayments impose on the borrower is far outstripping any good that would come out of it due excessive obligations as a result of an overextension of credit.

Notwithstanding the fact that debt made in the past was done so with the perception of infinite growth at abnormally high rates which don't match present reality. The difficulty in achieving escalated economic expansion requires policymakers to reign in the debt in the short term to medium term and only recommence once satisfied enough has been done.

But considering how indebted China is, roughly 250% of GDP, this would be a mammoth task for any government to achieve in a short span of time. Herein lies where the next frontier of economic thought is going, the Growth Dilemma.

How does a nation abate the long term implications of an action that motivates a short term solution to a dire situation yet leaves its citizens poorer by laddening excessive obligations to their sustanence?  

China’s mounting debt is hurting its tradition of using spending and lending to spur growth. https://t.co/3m8dUpcTUy pic.twitter.com/gbNvnHEotP

— NYT Business (@nytimesbusiness) July 15, 2016

How to analyse the Chinese yuan depreciation?

When combing through the past three months of financial market news flow you'd agree that the issue of China has gone very quiet lately which leaves investors wondering, why the sudden silence?

It's fair to say that Brexit and the rally in oil prices have dominated headlines for a while causing a disruption in the coverage on matters relating to China although it must also be said that a number of changes implemented by the Chinese government in terms of a lessening of financial market regulation have gradually been taking shape with the installment of a new Chinese Securities Regulatory Commission's chairman Liu Shiyu.

What we've seen evolve since Shiyu's appointment is a steadiness in the depreciation of the Chinese yuan against the dollar that eclipses the abrupt and sharp devaluation that took place in August last year that sent shockwaves through global markets.

The stark difference between the two events comes down to the fact that Shiyu has allowed the free market to decide an appropriate equilibrium whereas his predecessor, Xiao Gang, liberalised the market far too quickly that by the time it came to regulate the necessary parts in the market, participants saw this as signs of fear from the government.  

#China Onshore Yuan drops to 5.5yr low. pic.twitter.com/BGlT2q6YMz

— Holger Zschaepitz (@Schuldensuehner) June 28, 2016

Working hand in hand with the People's Bank of China (more commonly known as the PBOC) the CSRC has coordinated a greater certainty in policy going forward and in doing so has indirectly cooled down market fears from the height they had reached late last year.

This is yet another positive improvement stemming out from Chinese financial markets that will allow their securities to be included into global investment funds, thus broadening the diversification of investors in China.

However as much as China needs to be applauded with its efforts to align its own financial markets to a global benchmark, the actual depreciation of the yuan begins to tell a worrisome story of the future that'll have a profound impact on the global economy.

It says to us that foreign investors don't perceive a strong bounce in economic activity anytime soon indicated by the level of outflows that have exited the financial system this year alone. In the short term it may pull the brakes on the economy but over the long term it would certainly stimulate exports from China again.

Whether developed nations, who are suffering from severe currency appreciation, take kindly to this is another question altogether and will probably cause fingers to be pointed, increasing the chances of the world seeing a resurgence of currency wars.

Exclusive: China to tolerate weaker yuan, wary of trade partners' reaction - sources https://t.co/rVYUP3BnvT pic.twitter.com/10xVNrxSkj

— Reuters Top News (@Reuters) June 30, 2016

Chinese equity valuations still don't buoy confidence

As the world's attention turns directly towards the trouble brewing under the surface of developed nation economies, the hype that once set panic through the entire global financial system over the stock market bubble that had been built into the Chinese equities a year ago seems to have faded with the focus shifting to more pressing risks such as the impacts of negative interest rates, Britain's exit from the Eurozone and the slowdown in economic activity in major world economies.  

However when weighing up the high valuations attached to global equities in comparison to the world's overall future economic perspective, the concern is warranted but more so when you consider that Chinese equity valuations are three times higher than their world peers!!!

Furthermore given the surge in volatility that's surfaced in the past year you'd think it would've had some profound effect on scaling back valuations to within reason but yet this hasn't been the case with the measure remaining largely unscathed after the brutality of market moves.  

Suggestions imply although market concerns over developed nations takes centre stage presently, the mitigation of fear won't be offset if their leaders are able to avert a crisis of sorts, instead it provides market participants with further impetus to add more pressure on future certainty.

The belief that China's woes will simply diminish is a fate many have fallen ill too in the past and the risk of the same happening is being stoked by the fact that attention drawn on the matter doesn't feature more predominantly as it should. Perhaps it could be market priorities set on finding comfort in the certainty of developed nations which has been apart of market norms for some time however the idleness of dealing with the issue makes me start hearing the sounds of a tick-tock clock.

Even a world-beating selloff can't make Chinese stocks cheap https://t.co/Xa2O7fqEd1 pic.twitter.com/sT83785mim

— Bloomberg Markets (@markets) June 5, 2016

Are things looking better at China's stock market regulator?

With the onset of volatility grappling a directionless market at the moment, it doesn't quite compare to the hair raising periods most traders have experienced over the last year in financial markets. In attempt to pinpoint exactly where the troublesome environment grew from, traders wouldn't find it difficult to point in the direction of the Chinese equity bubble that's seemingly put the brakes on global equity valuations going higher.

At the time, August 2015 to be precise, there had been a protracted build up of negative sentiment flowing from China as to the raunch daily movements in stock prices that had taken place after an effort to liberalise the financial markets to be able to reach more participants had taken a wrong turn, sending investors into a flight of panic over the safety of their investments.

It appeared that former Chinese Securities Regulatory Commission Chairman Xiao Gang had overplayed his hand and allowed an excess of freedom for brokers to exploit individuals, most of these people inexperienced and ill-equipped to deal with financial instruments, by offering high levels of leverage that would offer them exposure at a fraction of the price thus creating a speculative frenzy to thrust valuations into the stratosphere.

This in effect caused wild price moves to develop once the CSRC decided to clamp down out of fear that it had caused an equity bubble to develop that could be devastating to the entire global financial system if it were to burst which at the time seemed highly probable given the extended rally.

The world noted this anomaly and took the que that now would be the best time to begin an anticipated selldown that had been expected to come some months before. All eyes were now squarely focused on the Chinese stock market, a position that didn't fit comfortably with government officials who prefer to hold their cards close their chests prompting them to enter the fray and halt the hemorrhage.

China moves to contain technology bubble https://t.co/nAEMhMk6oT

— CNBC (@CNBC) May 11, 2016

Pressure was on Gang to rectify his mistakes but it was too late and by the time it came to implement circuit breakers in January of this year, the signs were on the wall that his tenure as chairman of CSRC was coming to an end. The failure of the circuit breakers proved to be the end of Gang with Liu Shiyu taking over the reins.

At the time I wrote that Shiyu had a difficult task ahead in bridging the gap between the rules needed to be in place that would allow for functionality, marketability and transparency and the forces of supply and demand that would be harmed if too much intervention was placed in the market.

Three months into his new job and the emergence of the type of policy Shiyu will be bringing to the market is taking shape with the latest news that the CSRC will prevent companies that intend issuing new stock for the purpose of buying assets that don't form part of their core business from doing so in an effort to curb what many speculate to be a new bubble.

Opening up financial markets affords the companies looking for additional means of capital injection as much freedom as it does to the individual investor dictating over his financial freedom. However as we've witnessed with the newly founded Chinese investor, the level of aptitude hasn't matched the sophistication of their international counterparts.

This has led companies to neglect the business which forms part of its primary operations and find alternate ways of raising fresh cash from the market under the veil of hopeful prospects in industries that are benefitting from forthcoming positive sentiment due to their positioning in a transitive economy.

What confidence Shiyu measures give to the market is that public money is considered sacred, a juxtaposition from his predecessor who liberated investors but failed to foresee the shaky foundation companies issuing stock were standing on.

Although seen as more intervention rather than less, a contradiction to what authorities said wouldn't happen, I believe the move is in the right direction by emphasising the importance for companies listed on the exchange to be transparent and diligent when using funds raised from the public, a sign of progression when it comes to financial markets in China.

Hopefully this is just the beginning of great things to come from CSRC chairman Liu Shiyu who's started out on the right footing by calming fears and bringing order back into Chinese equities. However the challenges will come when global markets experience pressure from the lack of evidence of a healthy economic climate which would weigh down heavily due to China's part in the equation. The true test will be whether these officials stand steady in their convictions and if they've done enough to prevent a total collapse.

Are there any signs of recovery in steel prices?

The global steel industry still remains in a mess after the world's biggest producer, ArcelorMittal reported another loss for the first quarter of 2016 citing lower steel prices and lack of demand for the continuation of the loss making trend. Although the losses are marginally smaller than last years first quarter numbers, the steadfast grip Chinese producers are having on the industry is becoming devastating to a point where producers such as ArcelorMittal and Tata Steel are actively lobbying governments for protection in an attempt to save the industry.

ArcelorMittal says that the recent spike in steel prices were welcomed but it remained uncertain whether the current price fluctuations were an indication of a stronger move for prices over the long term saying warily that it will continue to put measures in place to protect the company's financial position.

A striking feature that's often heard when discussing the future of iron ore and more so commodity prices is the lacklustre demand stemming from China who helped spur on a doubling of demand for steel in a relatively short period of time, lending hope to many mining producers that a ramp up in production of iron ore could reap considerable rewards in the years to come.

That motion of thought came to an abrupt end when signs of an impending Chinese economic slowdown started being felt by world markets coupled with the typical reluctant tone from executives defending their stance and investment. At the time China had been steadily producing its own supply of steel that provided the dual benefit of supplying the construction sector with a key product in the process of satisfying explosive demand coming from an expansionary infrastructure program that took aim at urbanising China but at the same time providing millions of Chinese workers with a means to earn an income from an industry known for mass job creation.

However Chinese steel production is not known to be the most cost effective which is why politicians decided to heavily subsidise the industry by bargaining that it played a much greater role in making Chinese citizens believe that its government was delivering on its promises rather than seeing it be driven by the profit motive.

ArcelorMittal posts another loss despite signs that the steel industry is improving https://t.co/F1H2jiFquc pic.twitter.com/IQi2M2pJC2

— NYT Business (@nytimesbusiness) May 6, 2016

The perfect brew of dilemma was stirring up and when the economic storm finally pulled into the Chinese economy, producers found themselves in a pickle of not being able to find buyers for an overinflated steel market even though they witnessed a considerable drop in prices prompting many to look towards the biggest consumer and contributor to the market, China, for answers.

It appeared that Chinese producers themselves could no longer rely on their own local demand to sell their produce and began selling into the global market causing a flood of supply and thus squeezing the margins of other producers to a bare minimum. The severity of the drop in the equity valuation of these steel producing companies indicated that the bubble had indeed popped and the need to re-assess was the next stage expected to take place.

We've seen a string of proposals by major steel producers in dealing with the problematic situation of haemorrhaging vital cash flow needed to keep these companies afloat however here's the next problem; if governments continue to prop up these loss making entities in an effort to save jobs, especially at a time when the global economic climate isn't on its best footing, the glut we continue to see will remain in place until the dynamics of supply and demand can resolve themselves without the intervention of other forces.

Added to this is the observation that producers are seeking protection rather than speaking of the benefits of government expansionary programs. This is because they've realised long time ago that the government's themselves are in their own dilemma and pushed into a tight corner where the space to maneuver is becoming smaller as the piles of debt left after a slew of stimulus measures aimed at reviving the world economy has failed to produce the optimal outcome.

One really needs to question the confidence of world leaders expectations when making an opinion on their comments about world growth in the future. If producers of a primary commodity used to signal the beginning of an upswing in economic growth aren't singing the same tune as those standing on the podium of promises, its time to step back and rethink the nature of the beast.

MSCI non-committal to Chinese stock inclusion

During the height of volatility in Chinese equities that occurred in September 2015, MSCI CEO Henry Fernandez had stated that Chinese mainland stocks could be included in their portfolio of indices much sooner than many had expected and volatility would not play a role in deciding whether or not the inclusion of these stocks would happen.

But in an about turn stance, the index tracking company has now said that the interference by the State in preventing a financial market crash could hamper the inclusion of Chinese equities into its global indices and stressed to authorities the importance of ensuring that the errors of the past do not happen again thus reinstalling confidence into the financial system.

At the time of Fernandez's comments I said that it was a rather unbalanced opinion given the developments that had unfolded in the preceding weeks which at the time didn't feel stable by any degree. These concerns were confirmed by the summer long support by the Chinese government of equities.

Where to from here?

Well it must be said that the government's decision to remove CSRC Chairman Xiao Gang and replacing him with Liu Shiyu was a step in the right direction following the mishaps of Gang's tenure which included failure to properly implement circuit breakers to create an orderly market that proved to be the last straw for authorities.

Shiyu takes over after having served in a similar roles throughout the Chinese financial system but perhaps the biggest vote of confidence comes from his involvement in developing the bond market in China, the one half that forms part of the capital markets with the other being the equity market. Having participated in one part of the capital market gives Shiyu a sense of the longer term responsibilities that need to implemented in order to attract foreign investment.

It's vitally important that China heeds the call from MSCI if it wants to complete its transformation from an ineffective system that fails to work for its citizens into a fully fledged global financial system that's interconnected to the world's biggest financial markets. The final step in its completion of this goal requires free flowing foreign investment that isn't hindered by meddling from third parties, something that doesn't feel anywhere close to being reached.

MSCI is not quite ready to let China into the fold - yet https://t.co/Sd1ln1SGpA pic.twitter.com/V5uPSS7FIj

— Bloomberg Markets (@markets) March 31, 2016 

Obama makes a historic Cuba visit as US tries to restore lost ground

A historic moment dawned American politics when President Barack Obama became the first sitting US president to visit Cuba in 88 years after landing in Havana yesterday at the start of a two day state visit to the communist island. Although the two nations have often butted heads in the past, the diplomatic gesture of re-opening borders to one another does contain more of a strategic move than it does as a symbolism of peace between the nations.

It must be said that President Obama's foreign policy during his term in office has promoted restoring the image of the United States in the eyes of the most discontented nations who face the harshest sanctions imposed on them by the leader of the Free World, the balance of power in terms of world order has begun to shift away from the empire built on the American dream and into the hands of an ever-growing economic giant purported to overshadow that of the former with the sheer scale of its population.

China has gone on an extensive mission to win over the friendship of nations that have otherwise been left outside in the cold in recent decades in order to capture the necessary guarantees to access some of the world's largest reserves of mineral wealth in continents such as Africa. Chinese dealmakers have the added advantage of digging deep into their pockets to strike handsome payoffs after having accumulated vast amounts of wealth in a short period of time knowing very well that capital injection into undeveloped countries grants them a considerable leverage point to build good relations.

As these inroads have steadily accelerated with ambitious vigour, it hasn't gone unnoticed by the US who seemingly feels more and more threatened by an "Asian Invasion" in reference to its measure of political power in the global village. The United States relations with Africa and South America have been strained at the best of times however this latest trend has the potential to allow these continents a negotiating tool to acquire the best possible deal in wagering the benefits of one super power against the other.

The highlight of Obama's visit to Cuba so far: this cool picture https://t.co/uwzfkxIXrO pic.twitter.com/XvwDU4G0RA

— MarketWatch (@MarketWatch) March 21, 2016

Cuba is no exception when it comes to this competitive political power play when one thinks of the beneficial value that will be created from the trade embargo being dropped after 60 years in presence. The existence of these sanctions have for long been a political battleground for expressing the West's anti-communist views yet affirm that the fall of the Berlin Wall and subsequent demise of communism no longer pose a threat on world domination but rather the ascendency of a new imperium created from the very fabric capitalism subscribes to that deem these actions necessary to decelerate or put a halt on this influence of power.

Such drastic reversal in steadfast political thinking highlights a willingness by the US to evolve with an ever-changing political landscape if it wishes to remain in the upper echelon amongst the sphere of nations. I cannot envision seeing a departure from this standpoint as we've witnessed in the presidential election campaign's where certain candidates have stood out brazenly with their obscure ideals of how they'd operate foreign relations should they be elected to office.

If such ideals were implemented it would only open up further ground to be gained by the Chinese as refusal to accept new norms would certainly hurry away old enemies and possibly open old wounds.

The United States economic restoration of ties between Cuba provides the communist nation with a gateway of opportunities that could add more value to its economy than any other of its trade partners, an image that could bode well with other South American countries who currently don't hold a good view of the US but could be swayed into thinking there may be more to gain from future deals than American self-interest.

Don’t expect U.S. companies to follow Obama to Cuba en masse any time soon https://t.co/9acBMYxf04 pic.twitter.com/1QjHZDzJ4K

— Bloomberg Business (@business) March 21, 2016

Resurgence in commodities are only short term in nature

Colossal; the best way one would be able to describe the movements that's been witnessed in mining counters over the past year with the present bounce making no exceptions when pulling off hair raising moves that would frighten even the most experienced trader. The perception around this relief rally is that it was a response to a rather dramatic selldown and should only to temporary.

I found this chart tweeted by the World Economic Forum which shows the net exports/imports of various nations around the world in terms of commodities as a percentage of GDP. The resource abundant countries make up the usual supply force that determine the amount of quantities available to the market however the most interesting shades on the geographical chart are those that are resource dependent or otherwise the part of the market that stimulates demand for quantities.

The most distinctive areas that we are able to identify are countries such as the United States of America, Japan, Europe and China. I have mentioned these countries specifically for a reason because if we think about the economic commentary that's dominating the news flow currently we'd find that all these countries are suffering from economic inaptness.

Japan and Europe have both implemented negative interest rates that has the world flummoxed about whether these extents to monetary stimulus is either a hinderance or a necessity to the financial system. The inability to abate a deflationary price environment has meant that central bankers are pressured to pick up demand or face dealing with an inactive economy that refuses to budge.

China has gotten stuck in a transitory state between transferring between that of an industrial based economy to a consumer services oriented economy. Investors are hopeful that government may indicate that it intends on lending a helping hand to the economy that has stumbled along but the role of government is slowly diminishing as increasing debt piles continues to prevent them from executing radical infrastructure programs that would boost the economy.

The US looks like the only nations that has the capability to steer the world economy in the right direction however if we look at economic indicators being reported they would suggest less than needed activity showing that it may not be the saving grace the world's looking for.      

Could the commodity crisis be an opportunity for #Africa? https://t.co/68Fwchtviw #commodities pic.twitter.com/wtN0GRhlM2

— World Economic Forum (@wef) March 8, 2016

All these nations have pertinent issues that trouble their outlook but more so the fact that each one has been place in a trend of slowing economic activity at the same time makes for a bigger implication for the global outlook as a whole.

We've seen commodity stocks radically improving after last years onslaught brought on by supply glut fears however the rally that has evolved does not feel as if there is a steady trend of long term buyers entering the fray but rather that of a short squeeze. It would be dangerous to think that we've seen the end of a disastrous time for commodity stocks because there remains issues yet to be resolved.

Iron ore prices spiked 19% on Monday 7th March 2016 to record the largest one day jump ever but Australia's steel trade port was shut down due to a hurricane that halted operations together with a bolstering demand for steel following the end of holidays in China have all played a part in helping prop up prices in the short term however a supply glut looks likely to remain in place for the next 2-3 years if demand doesn't pick up significantly.

Oil remains a key component in deciphering any direction. With OPEC on its knees and shale gas producers drowning in debt, its quite evident we are far from the resolution required to allow prices to begin its ascent.

Then there's the big issue of debt that seems to be haunting many mining producers. Although fears may have faded for the time being, the increase in commodity prices we've seen so far this year isn't sufficient to generate cash flow to pay away these liabilities quickly enough to chase away credit ratings agencies from downgrading them further. While the market has become intoxicated with optimism they've forgotten these issues that haven't gone away.

Before we see a return of investors in the mining sector companies will need to show steady demand for its products and with supply gluts on the scale we've seen so far as well as the lack of response to stimulus measures from the four nations I mentioned above I don't envision seeing this happening anytime soon.

Travelling Technicals with Global Indices: The Hang Seng

A few weeks back I did analysis on two Chinese indices that represented a number of stocks listed in mainland China and discussed what impact financial market reforms were having on the valuations by driving up prices due to the speculative nature of the participants involved. I also said that the lack of significant interest in Chinese financial markets had made both fundamental and technical analysis very difficult until recently when government took the decision to liberalise the stock market.

Today's chart focuses on a market that forms part of China yet was absent of communist rule during the height of the political system. The region of Hong Kong was occupied by the British for many decades but has subsequently been returned to China with a great degree of autonomy attached to it. The region provided Britain a trade port to access to Asian economies and has grown its relative importance amongst the world's prominent financial centres to one of the most closely watched.  

Hong Kong's strong links to the West has meant that its financial markets are sturdy and well regulated allowing Chinese policymakers the chance to examine the blueprint of how these types of markets should be run. The Hang Seng Index has a long history spanning as far back as 1969 with many Chinese companies opting to list on the established Hong Kong Stock Exchange. 

Quarterly

Since the index has a long history I decided to take advantage of that by gauging the movement we've seen happening over the last 28 years. This gives us a much clearer picture to how things have panned out over almost three decades but more importantly how the handover of authority in 1997 back to the Chinese government has translated into better or worse returns for companies tracked by the index. 

If we look at the high of 16 000 made in 1997 and immediately look at the highest point to date which happened in 2007 with a level of 32 000 that's double the valuation in 10 years. Up to this point things were looking good for the index until 2008 when it all went pear shaped. 

I also noted a steady uptrend starting from 2003 and still remaining in place with a recent retest at 20 000 in this quarter. The confluence between this support and the 50 SMA gives the bulls some space to manoeuvre however the fact that price attempted to break away but was stopped abruptly in its pathway leading to even bigger declines suggests the sellers are on the prowl.  

There was a period between 2009 and 2015 where price seemed to hover around and failed to register new highs or low which is why the failed attempt to break higher is so critical in our analysis. The compressive nature of price action over an extended period of time meant that the direction in which price moves would guide us over the medium term. 

Monthly

A common theme I've found with most global equity indices is the uptrend formed after the lows of 2009 were put in with this chart not being the exception. Observing the compressive environment made me pay particular attention to the space I marked out in the previous chart with a square. By zooming in I was able to find an ascending triangle with a projected 50% upside potential. 

Had this pattern worked its way through we might have seen new highs being put in by the Hang Seng however this wasn't the case as the retest proved all too fatal for the formation with price piercing easily through the long term uptrend indicating intention to change sentiment. 

The fall that has occurred over the past year has wiped out a good amount of gains made but I wouldn't be surprised to see price regaining some lost ground over the medium term, possibly testing the underside of the uptrend which should provide stiff resistance. The stochastic confirms this views by lying in oversold territory 

Should that happen it is unclear what direction the index could be headed to but because the long term timeframe would suggest a failure to break higher my suspicions would be to the downside. The level of 16 000 could be the support you ought to look for in this scenario. One thing is clear from the first 10 weeks of analysis, the year 2016 looks likely to be a grim one.   

Moody's slashes China's outlook from stable to negative

Moody's rating agency has slashed China's outlook from stable to negative as it cites growing debt piles as a concern that could possibly send the Asian economy into turmoil if more isn't done to prevent it. The rating agency says that the government's reliance on fuelling demand with credit growth as well as the dependency by state owned enterprise to plug seeping holes could haunt them in the future if they aren't careful.

We've seen an outpouring of supportive statements from policymakers particular those involving the matters of the economy in an effort to get reforms back on track after volatility spread an ugly mess throughout the financial system late last year.

Part of government's promises was to overhaul the system whereby their currency is traded more freely however this has been mired with uncertainty as a recent devaluation cause a tremendous wave of doubt rippling through the global economy which was subsequently placed on hold so as to not cause further harm.

The PBOC has resorted to drawing down foreign currency reserves to protect the currency from external pressures that would require it to devalue more than what would be desired pushing authorities into a corner over what decision needs to be made.

I think China will be unable to sustain the rate of drawdown it is currently experiencing in its foreign accounts although there may be a hefty sum on hand it certainly won't last if the situation were to spin out of control, a scenario Moody's sees as possible. China's alignment to global standards in terms of financial markets means that it cannot meddle the way it is use to deeming their efforts worthless if not worrisome.

Hinderance of a financial market by any institution equates to the same outcome, a distortion that skews the picture away from reality that eventually ends up in tatters. Chinese authorities recent effort to bolster confidence in its ability to reform did show signs of integrity however that is not the end of the line of communication with more transparency is needed in relation to the timeframe with which policymakers intend on implementing a change to a more open market platform.

#China's credit rating outlook cut to negative over debt concerns https://t.co/nIMSNKj3o0 pic.twitter.com/0SsN8DHBTn

— CNNMoney (@CNNMoney) March 2, 2016