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.

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

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.

Another financial house looking to move out South Africa

A new week another dent in the South African government's plan to inject confidence in its financial and banking system as news overnight reported that insurer Old Mutual Plc is considering splitting its entities into separate companies leaving investors wondering if the longer term implications of President Jacob Zuma decision to fired Nhlanhla Nene in December, after a fallout between the pair, could be setting in motion a deafening vote of no confidence in his or his cabinets capability in keeping foreign investors at ease with reckless actions that potentially open up avenues to tougher economic conditions.

Actions taken by Zuma in early December 2015 caused gyrations throughout the South African financial system calling into question the independence of Treasury and sending the local currency, the Rand to all time lows of R18 to one US Dollar. The Top 4 Banks suffered major devaluations following the announcement in concern that Zuma might be wrestling over control of Treasury for his own gains, inherently implying a much greater risk when considering the height of bribery and corruption charges that were levelled against him before his tenure as president.

This is the second financial institution in less than a week to make such a move with many expecting more to knock at government's lack of trustworthiness. Barclays Plc announced last week that it intended selling down its 62% stake in local and African exposed Barclays Africa Group but at the same time not giving away too many reasons why it planned such a move.

As Barclays exits Africa; Old Mutual considers splitting operations https://t.co/UfD7aGr5eY Watch @cnbcafrica's interview on Friday with CEO

— CNBC Africa (@cnbcafrica) March 7, 2016

Old Mutual is said to be looking at unbundling Nedbank Group, the asset that strikes the most interest at present as well as its wealth management in the UK and surprisingly its emerging markets business that resides in South Africa.

We have seen a steady decline in sentiment favouring investment into emerging markets over the last year after the interconnectedness of world economies to the activity of China has caused a knock-on effect that has seen a slowdown in global growth but more specifically these nations as they have geared themselves up towards driving Chinese growth.

However we should not be led astray by international economic issues affecting the world although they play a significant part in the whole equation, we should scale down into the country specific factors that have contributed to the sell off and resultant capital flight as there are wider implications that lie ahead for the health of South African financial markets instead of falling in the trap of believing that the country has been simply placed in the same basket with other poor performing economies.

The ruling party's hastened reaction to the decision made by Zuma and subsequent about turn stance of support for Zuma or rather lack of after affording him sufficient space to sow the seeds of discontent in South Africa shows a lack of interest in segments of the economy that do not translate immediately into severe financial market volatility that sparks the interest of the international media.

Profound support of controversies such as the Nkandla debacle, nepotism in government departments and blatant spending abuse from officials have propped up Zuma's political strength that meant the decision he took was based on his confidence of overall support from the party up until now. The party only has themselves to blame for what has transpired and any measure put in place to try undo the negative externalities caused by such event will ultimately fail because investors have lost their faith in the government and ruling parties ability to govern South Africa.

In stark contrast to the daily protests we see on the streets filled with millions of dissatisfied voters, the silent yet disastrous move by foreign investors to leave the country indicates the steering force money has over those in power.