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.

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

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

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

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

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

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

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

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

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

The 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.  

US Federal Reserve continues to be under pressure

Minutes of the FOMC meeting that took place in late July showed members of the US Federal Reserve were cautious in their belief towards hiking interest rates for a second time since initially setting the trend in motion last year in December. Although there was a considerable amount of debate whether the US economy was fit enough to sustain a fresh hike, it was decided that more certainty in terms of members full agreement on the timing of the move would be necessary.

We saw remarks earlier in the week from New York Fed President William Dudley emphasising a number of points directly showcasing the strength of the economy whilst going on further to say an interest rate hike was still on the cards at the Fed's next FOMC meeting in September.

But as surprising as it may seem, markets hardly reacted to the enticement by Dudley instead remaining relentless in its view that the current progression from other central banks around the world in extending bond-buying programs while simultaneously exploring the "new" lower bounds of interest rates underneath zero percent was slowing down the Fed's ambitions.      

#Fed minutes this week may show why Yellen & co kept timing vague on next rate increase https://t.co/gw5pirYkWY pic.twitter.com/NmnIWAwiNv

— Bloomberg Economics (@economics) August 16, 2016

Inasmuch as the economic indicators relied upon by the Federal Reserve to make a decision constantly show positive signs within the US economy the issue of enforcing an interest rate becomes a different matter altogether with the alignment of countries economic policies over recent decades making pulling the trigger harder than it looks.

It requires a consensus from all other nations in following the direction of the move although not necessarily to the exact same timing as the other. If we looked at the current global monetary policy stance that's dominating headlines, it doesn't appear wise to apply discretion in the contrary direction which places the Fed's expected trajectory under scrutiny.

Should the Fed see a divergent policy appropriate it would mark the first signs of an uncoupling of a global understanding where the economic decision taken by an individual country no longer influenced by its impact or effects on its counterparts.

Or contrary to this we'll see a less stringent pathway of interest rate hikes with an eventual outcome of the Fed buckling under the pressure of a joint global effort to exploit monetary policy to its withers end till the point of financial catastrophe.    

The longer the Fed stalls hiking rates the more likely it'll fall prey to the second scenario because with every meeting that passes with no action registered a wave of doubtfulness will fill the thoughts of market participants who've already become accustomed to "easy" money to drive up asset prices higher and eager to test central bankers commitment further.    

Japan's economy proving policymakers wrong

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

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

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

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

— Jennifer Ablan (@jennablan) August 15, 2016

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

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

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

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

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.

Do negative yields call for bold new economic policy?

An emerging topic that's gaining traction of late is the tremendous shift seen in developed nations bond rates with some nations sovereign debt trading at negative yields, a world first. The ever expanding debt load that's fallen below zero yield has begun consolidating after initially bulging outwards at an alarming pace but could be fuelled further if investors search for positive return is exacerbated by the enormous demand for both US Treasuries and UK Gilts.

As of today the US 10 Year Treasury yield recorded an all time low as buyers stormed through sellers demands as fears from Brexit flood the market with worry and the outlook for the interest rate environment drifted away from expectancy of normalisation after a lengthy period near zero, a once thought lower bound of rationality.  

Stocks are overstretched and have been for a while considering the previous quantitative easing measures that had were in place for some time which prompted companies to take advantage of the low cost of borrowing to repurchase stock in the open market. Although the effects of this helped extend the bull market by an extra year or two the party soon came to an end when the taps turned off and earnings were suppose to continue their growth.

This hasn't happened, in fact earnings are fading fast along with the global economy that can't find the right footing to leverage the mounds of debt created to act as stimulus.

The US Federal Reserve divergent plan to act in a different manner to its developed nation counterparts is a far greater mission than had been expected which is why investors foresee it departing from this policy stance and reverting back to its old habits of printing money till the cows come home.

Why is this all bad?

Simply because the world cannot function on the perpetual money creating scheme that has so many politicians fixated with in an effort to cover up their own flaws. We've entered a new era of economics and the need to find policies that branch off from convention yet address the evolutionary problems that constantly grow as year go by cannot be without fail.

We trust the message of the bond market over stocks.#stocks vs #bonds$TLT vs $SPY#GrowthSlowing@KeithMcCullough pic.twitter.com/EvlfjctE6o

— Hedgeye (@Hedgeye) July 1, 2016

Will the Fed's hesitancy lead the market to see more risk?

Wait and see; that's the approach expected to be taken by the US Federal Reserve at today's announcement around its decision on interest rates that are yet to see further hikes after initiating the first such increase in rates in almost a decade following the Fed's December meeting. Since then the market has been largely affected with issues like China's economic growth stagnancy, a European refugee crisis and now a possible exit from the EU by the United Kingdom.

All these events have prevented the Fed from acting on their aspirations of seeing the Fed Funds Rate sit at a targeted level of 1.4%...pretty rich coming from a central bank that's been artificially fuelling asset bubbles since the introduction of Quantitative Easing.

Many at the time shot down the FOMC's projections by reiterating the weak global economic outlook that seemingly took hold of proceedings in the latter half of 2015 that was expected to last throughout the entire 2016. We've seen those conditions escalated in the first half of this year with advanced economies taking the front seat in terms of uncertainty, all showing signs of dragging down global growth.

5 things everyone will be talking about this Fed day https://t.co/BpeQaWs9ht pic.twitter.com/EGLOIU2ex1

— Bloomberg (@business) June 15, 2016

Brexit might be the excuse used this time but the Fed knows very well that if it continues to stall hiking interest rates the higher the likelihood will be for it to renegade on its normalisation policy.

The real risk presenting itself in the global financial system resides in the fact that central bankers are losing their influential hold on directing their economies by allowing world government's to fall back on monetary policy to reboot the global economy.

This no longer stands as a strong deterrent of deflation that poses a risk to an ever increasing debt mound that injected myopic confidence into a system with the results proving unsuccessful. It also shows a worrisome sign for the economic outlook that partly fed the miniscule economic growth numbers we've seen up until now.

Questions are being asked whether US Treasury's will follow in the footsteps of fellow nations such as Japan, Switzerland and now German in dipping below negative yields?

I don't think the answer to the question should be to speculate whether they could but rather what are the implications if they do and these nations should decide to start the normalisation process considering their bond instruments are amused "safe" and investors continue to flock into them to weather the financial storm.  

Update on Global Bond Yields as Global Growth continues to slow pic.twitter.com/h6jL2hcWlF

— Keith McCullough (@KeithMcCullough) June 15, 2016

Are negative yields taking over the bond market?

As chaos begins to descend into financial markets again after a hiatus that saw oil prices bounce strongly, the Chinese growth dilemma take the backseat and central bankers announcing additional rounds of quantitative easing measures to be put in place, the outlook remains hazy with investors increasingly placing their bets in the least perceived riskiest asset namely government bonds in the hopes that it could yield them some sort of meager return that's been absent in portfolio's in the last year.

Subsequently the demand for high quality government bonds issued by nations such as Japan, Switzerland and now Germany has been driven so far that yields have turned negative, a first time phenomenon that's left many puzzled.

Critics of the current monetary view of Negative Interest Rate Program (abbreviated NIRP) by advanced economies such as those mentioned above have spoken out at arm's length about the distressing outcome these nations could be headed into if they don't allow sanity to prevail in realising the limits of monetary policy having reached an irrevocable end at the extreme side of the spectrum.

A staggering $10 trillion bonds at face value currently trades underneath a yield of 0% which has been steadily rising as the situation spins out of control compelling investors to seek out riskier alternatives that hardly leaves much comfort in its placement. Parlously slated assets that are starting to feature in portfolio's include long dated and junk grade status bonds.

In the case of the former, investors feel it justified to give up the opportunity of lending capital out in the short term just for the opportunity to earn a positive yield!!! Furthermore the implication of such belief leads one to ponder the ramifications that will be felt when desperation no longer holds appropriate and the shift in policy direction takes hold, amounting to immense losses suffered as a result.

For all its worth if one outcome were to come of the present and the future it would be the underlying fact that no single controlling economic policy mechanism is able to steer forth the weight of economic activity without the assistance of the other. It would also stress the need that government's inaptness to respond in a constructive manner doesn't exist under the premise of socialist ideology instead working on a fallacious conception that infinite quantities of money are available at hand to allay the harshest economic circumstance which couldn't be farther from the truth.

The global economy is slowly metamorphosing into the ugly looking monster that reared its head in the Financial Crisis however this time the consequences will be worse.      

Paradigm shift!
Government bonds: 'return-free risky assets'! pic.twitter.com/CPRHqj0a6f

— jeroen blokland (@jsblokland) June 10, 2016

Is the Fed correct in thinking rate hikes?

When the Fed finally lifted interest rates in the US for the first time in over a decade last year December the tone that was struck by the Fed was one of caution in its pursuit to normalise the interest rate cycle from an abnormally low rate for an extended period of time.  At the time I had written that although the Fed had envisioned to see its reference rate near 1.4% at the end of the year suggesting four rate hikes during the course of the year, it was highly unlikely that we would see that develop given the nature of the global economy as well as the converse pathway being followed by most of its developed counterparts.

The Fed didn't sideline this issue stating that the normalisation process would be taken in accord with the strength of the world economy knowing well that a steep climb in interest rates could destabilise the entire financial system. It's fair to assume that the Fed has stuck by its word by reconsidering a proposed hike in April saying that the outlook of the Chinese economy was waning on the global economy making it difficult for them to lift rates.

But yesterday the Fed's Minutes of Meetings for April were released showing that most FOMC members were ready to hike once again spooking the market into recess at the mere thought of it. The news came as somewhat of a surprise as many were expecting the hiking process to be further delayed to the first half of 2017.

Fed signals interest rate hike firmly on the table for June https://t.co/K25aq8kE1r pic.twitter.com/j2fe5xHXeM

— Reuters Top News (@Reuters) May 18, 2016

If it were to happen it would certainly set the trend for the divergence between developed nation's monetary policy which would indicate a departure from the current undertaking of economic coordination so as to insulate the world economy from shocks and place a concerted effort from all nations on finding a unified solution to economic hardship. A common theme that's cropped up often over the last while is the need to protect a nation's sovereignty giving further evidence that the economic pathway countries are about to endure upon requires solitary objectives as opposed to collective thought.

The move certainly provides short term relief for currencies such as the Japanese Yen that have suffered severely from policy mismatch with participates inflicting the opposite action the BOJ had expected them to after announcing an expanded and extensive stimulus program. The market has been unrelenting on countries engaging with negative interest rate policy with many warning the negative impact they will have if implemented.

This leads me to the first reason I believe the Fed isn't foolish in its decision to continue hiking rates as its escaped the trap of falling into the mindset of NIRP which could've thrown the US economy further into the abyss, instead relieving the reliance of the monetary policy by shifting economic policy decision towards fiscal decision makers. This issue has been spoken about from a number of institution who have said the functions of monetary policy have started to wear thin and the need for governments to restructure their economies a necessity.

Secondly the US economy although considered weak when looking back at previous years is much stronger relative to its peers currently, so when weighing up the pros and cons it would lean towards stabilising the economy rather than making it softer by delving deeper into negative territory with interest rates.  It's facing up to the headwind risk that's been created from abnormally low interest rates to be certain of normalised policy in the future, an aspect that doesn't feature at all in Europe and Japan.

If there were anyone that would be disappointed or despaired by the guidance it would be market participants who haven't adapted to this new way of economic cooperation or rather lack of. The sudden price moves that occur as a result of policy decoupling should be expected as the notion of paralleled policy enforcement no longer matches. It wouldn't be naive to think that such a move might aid the momentum of a new economic shock which I have no doubt, but we haven't reached a point where we can clearly assess the severity of such an event should it happen.

For now being aware of a changing tide is all that matters, its certainly going to make things interesting in the short term and more so over the long run.

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.

Mario Draghi under pressure to deliver extra stimulus

Much of the interest around this week's trading calendar has been set around the decision by the ECB pertaining to additional measures of stimulus that's being expected to be made today when ECB president Mario Draghi makes his announcement later this afternoon. A lot rests on his shoulders with major expectations for the central bank to use every possible weapon in its arsenal to arrest deflation and return the European economy back to growth.

But Draghi hasn't drawn the perfect picture for market participants to grasp onto with a shock decision made in December 2015 that came across more hawkish than dovish which was the counter to what was expected. However the tone changed somewhat when Draghi appeared at the annual World Economic Forum held in Davos in January where he said that the ECB was considering upping the ante on its stimulus program as early as March as well as placing emphasis on the line "lower for longer"in reference to the interest rate set by the central bank.

These mixed messages have placed a great degree of nervousness around today's announcement with many fearing an unexpected surprise that could alter the entire course of the Euro currency against other major currencies and as a result we've seen a weaker Euro building up to today as the stakes remain high on the outcome.

There are a number of points participants have said they will be watching closely for, such as the level of decrease it sees the interest rate to be dropped to, whether the amount of bond purchases will remain the same or be increased and Draghi's forecast to how far the current QE program will be in existence with some looking for further extension past 2017.

5 things to look out for when Mario Draghi announces ECB's latest decisions https://t.co/dKNeQi4tUE pic.twitter.com/nMvqwqZnI3

— Bloomberg Business (@business) March 10, 2016

Draghi will be under pressure to deliver accordingly or else face further setbacks in an effort to prove that the measures put in place are sufficient to reach the ECB goals of defeating deflation. Partly to blame for the lack of confidence in the central bank have been a number of international issues dragging down global investor confidence such as China's failure to reignite growth and the US gradual but slow recovery that has yet to inspire much faith in worldwide stability.

This chart found in an article on Bloomberg expresses the belief that the efforts by the ECB have failed to spur on European equities with the chart representing the Stoxx 50, the largest 50 companies in the EU. Although Europe has much more listed equities than the selected few exhibited in the index it does serve as a gauge of investors mood to investing in European equities. 

The ECB is not only fighting against external economic matters that press it to take corrective measures but of the four events highlights three resided in Europe adding further weight to the downbeat conditions experienced over the past year. It suggests that investors need to place greater pressure on the government's within the EU region to form a common consensus over the direction it is headed too instead of finding continual resolve in the ECB expanding monetary stimulus. The longer disunity in the EU remains the less effective ECB policy measures become as the timeframe of any economic policy is limited. The notion of extending specific policy further away from the intended time lapse only adds additional risk to an eventual ending. 

Draghi will also be reluctant to pass on negative interest on excess reserves to banks who have seen a dramatic selloff recently following concerns that the debt taken on during the shale gas boom might be close to implosion if the oil price doesn't recover fast enough. The ECB is partly to blame for the situation developing in the way it has as interest rates being so low has squeezed banks margins significantly prompting them to find better returns in riskier assets. 

However the added risk has exposed these banks to more potential damage than they would be use too and thus any further decrease in the interest rate would place grave consequences for banks in the medium term. This is why participants will be on the lookout for how Draghi will implement NIRP (negative interest rate policy) with the current trend set by the Bank of Japan recently who applied a system of tiered excess reserves that determined which reserves would be obliged to be pay over a charge for storing cash. 

Having this amount of considerations to apply thought too does leave open the possibilities of Draghi slipping up which can be sensed in the mood of the market currently. One does hope that Draghi comes into this announcement prepared but we can never be certain especially after the events of December that shocked the markets. The best course of action would be to wait on the sidelines and wait and see how the market responds as this does have the potential to move markets globally.