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

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

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

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

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

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

— zerohedge (@zerohedge) September 30, 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.  

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.

Central banks defiance of reality can't last forever

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

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

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

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

— Piotr Skolimowski (@Skolimowski) September 9, 2016

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

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

Why markets increasingly becoming correlated spells trouble?

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

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

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

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

— Bloomberg Markets (@markets) September 8, 2016 

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

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

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

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

Riksbank highlights the risk the ECB is creating for other economies

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

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

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

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

— Livesquawk (@Livesquawk) September 7, 2016

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

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

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

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

The Closing Position: Wrap of this Week's Blogs

The Fed's indecision is making markets nervous

Technical Tuesday: Altria Group Inc.

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

5 Steps to Becoming an Algo Trader

Are EU economic indicators a true reflection of Europe?

Are EU economic indicators a true reflection of Europe?

It's fair to say the questions of doubt over Eurozone leaders ability to steer the free economic zone clear of the dangers has been spoken ad nauseam from critics who insist the stark differences in ideology amongst member nations would lead to a break up. We've already seen the United Kingdom hold the first referendum asking its citizens to decide whether they wish to stay or leave the Eurozone Agreement.

But behind this current backdrop swirling through market sentiment is a tattered past littered with political discontent that's driven the major players within the European bloc to show face in light of market fears when divorce seems imminent. Needless to say each crisis produces an element of inconclusive resolve that's so much needed in finding a concrete solution around long term sustainability.

However the survival of this doomed currency union has only been kept alive with the aid of artificial economic stimulus in the form of a loose monetary policy involving consecutive rounds of quantitative easing that's only achievement being the presence of excess liquidity in the economy with hardly any uptick in activity.      

#Germany ≠ #France! German consumer #confidence rise to the highest level since at least 2005. pic.twitter.com/rEB915wmsw

— jeroen blokland (@jsblokland) August 26, 2016

The existing trend surrounding consumer confidence between the two biggest economies in the Eurozone, namely France and Germany, leaves many wondering how this indicator continues to defy logic besides the region being in perpetual crisis.

Although its important to note that the figures presented in the chart above have an oscillating nature by moving between negative and positive values with the position of the overall Eurozone consumer confidence index lying below zero indicating some degree of pessimism, the explicitly seen uptrend in both these charts leaves more questions than answers.

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.  

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.

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.  

The next EU crisis; Italy's banking system

Just as the heightened fear and uncertainty reached frightening levels after the British referendum to exit the EU, it appears the event has indirectly influenced a trigger of a fresh crisis concerning Italian banks. Although Italy's banking system has been under strain for some time, the markets shifted focus away from a potentially devastating financial implosion has made the likelihood of such occurrence edge closer to happening.

And if you thought the European circus of politics couldn't entertain you anymore than it has, a regulation passed by the European Commission preventing member governments from bailing out ailing banking institutions is going to have dire consequences on the strength of the union if it cannot be overlooked.

Effectively the EU wants creditors to suffer from losses made by the banking institution, a term referred to as bailing in, instead of allowing governments to mop up the mess. If the EU were to succeed in upholding such policy it could mean funders aiding the banks with credit to generate loans would now be less convinced to provide financing facilities as well as cause a collapse of the entire Italian banking system if continued signs of financial stability erosion isn't plugged.

It should be said that a figure of 17% has been bantered around as a measure of the amount of loans that are considered "soured" or "bad", meaning an unlikeliness of being recovered which equates to roughly €360 billion in loans that cannot be paid!!!

Moving on to the economic dynamics that would lessen the severity of a mass default, lack of any confidence can be found when considering that the Italian economy has grown underneath the 1% band for far too long to shine any hope on the matter. Some analysts have cited the inadequate depreciation in the Euro versus other major currencies has made Italian goods & services more expensive when compared to its counterparts giving impetus to calls from nationalist parties for an exit out of the EU agreement.

Bad-debt warning triggers fresh fears for Italian banks https://t.co/rxW2sPduwD

— CNBC International (@CNBCi) July 5, 2016

That reality became much more real after the British referendum which not only put the final nail in the coffin of Euro optimists but also feted the grievances among citizens of Europe. Inasmuch as politicians in the region might find diplomatic and flexible solutions to devilishly avoid evidence proving closer integration a mass failure, the full effects being felt by the ordinary folk on the street has become so insurmountable that its caused a revolution of opinion.

What was once seen as beneficial is now seen as thieving sovereignty if agreeing to generalised policy that might stand in one country but has no place in another.

Italian prime minister Matteo Renzi will have to decide whether he should followed the prescribed rules set out by the EU commision or ignore them and face the consequences of the trade bloc but inevitably save his nation's banking system from collapse.

The EU's lack of flexibility over this simply enforces the notion of drawing out extreme cases where convention is disregarded and rules firmly stated instead of dealing with the issue at hand. This only serves to weaken the EU and strengthen the case of Euro-Skeptics who are convinced that this will all come crashing down.

Italy can't succeed economically if their banking system is placed in such a poor state that it drawdowns confidence in them.

Is the Danish central bank creating currency risk?

At the start of the week I decided to focus my attention on major currencies and the volatile climate they were exhibiting as well as the troubling situation most developed nation's central bankers are finding themselves in trying to reverse the years of expansive monetary policy measures that has produced ill-effects that are seemingly weighing down economic activity.

The monetary noose that hangs around these nations necks seems to be getting tighter with every consecutive week that passes as the trickling news flow slowly starts to build up momentum to turn this cash flush fanfare into a nightmare on Elm street.

Being aware that there are a number of countries mostly in Europe that implemented such extreme measures of sinking interest rates below zero before the ECB and BOJ joined the foray, it would make sense to find the nation that's had these measures in place the longest and assess whether there's been a level of success.

As luck would have it I found a handful of stories about the Danmark Nationalbank who currently holds the longest reign of interest rates in negative territory with the ongoing recording setting feat sitting at four years!!!

The funniest part is only last week Governor Lars Rohde cautioned those who wished to speculate against the central bank saying officials would unpack whatever measures were necessary to stop the Danish Krone from appreciating against the Euro. The reason for such a strong message is revealed in the fact that the DNB has placed a peg on the level it wants to protect the Krone from surpassing against the Euro.  

Don't bet against #Denmark’s central bank https://t.co/cDZcwbmWm2 via @PeterLevring pic.twitter.com/s2rm7Fkk1u

— Zoe Schneeweiss (@ZSchneeweiss) May 13, 2016

Tough talking didn't prevent a scare from happening early last year when the Swiss National Bank, who itself had a floor in place against the Euro, abruptly removed the peg in an unexpected move that created a toxic currency whirlwind of volatility that reverberated throughout the entire financial market.  At the time, the DNB defended its own peg bravely after speculation became rife that it could follow suit with the SNB and remove the floor.

However once things settled down the Krone began depreciating, helping it avoid the inevitable ascent the DNB hoped to ward off but this time it decided to use foreign currency reserves it had built up over years since negative interest rates hadn't assisted its objectives up until that point. 

It's imperative to understand that the reason the SNB removed the floor against the Euro is because the ECB was speculated to and has now begun a protracted quantitative easing program that would would sponge up all the foreign reserves the SNB had available which had fast depleted once speculation grew. The issue came in the nature of the communication between the SNB president Thomas Jordan and the public with the perceived level of trust towards the central bank amongst the highest out of all its peers.

Jordan's timing of the removal of the peg was left too late in the game and miscommunicated improperly that direct fault can be pointed at him and his colleagues for creating mass panic that left financial markets reeling.

Currency intervention an imminent risk in Denmark, Nordea says https://t.co/DT8mJYPwQ0 via @CHRWIENBERG pic.twitter.com/mo4WDNLMKJ

— Bloomberg Markets (@markets) May 20, 2016

If common sense prevails, the market would've realised that the mammoth monetary stimulus currently being effected by the ECB dwarfs all the monetary programs being meted out by Nordic countries including that of Denmark. These nations are simply too small to compete against monetary stimulus of this size and scale which means their local currencies get brushed aside by the waves of crisis-fearing money making its way to their shores in an effort to shelter wealth.  

This probably explains the markets skittish sentiment after Lars Rohde made comments refusing to concede his effort to the market and allow a free hand to decide appropriate equilibrium. It translates into the possibility of seeing another SNB type shock descending into market sphere's, adding risk at a time when major currency volatility is at its height.

The worrying foreign currency reserve drain that's occurred over the last year surely puts the writing on the wall for DNB officials or is this yet another case of attempting to cover up the flaws of a failed process that isn't working and probably won't be the saving grace of the world burdened with troubled economic times.

#Denmark Foreign Reserves have been shrinking for some months sending worries over whether the peg will be remove pic.twitter.com/atKWg44xsH

— Quinton Mendes (@CadeTradeR) May 20, 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.