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
Showing posts with label Negative Interest Rate. Show all posts
Showing posts with label Negative Interest Rate. Show all posts
Saturday, 27 August 2016
Thursday, 18 August 2016
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.
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.
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.
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.#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
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.
Monday, 15 August 2016
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.
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
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.
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.Japan's economy stalls in April-June, casts doubts on Abe's policies https://t.co/AIGc6FpAlG— Jennifer Ablan (@jennablan) August 15, 2016
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
Thursday, 11 August 2016
Political risk back in the spotlight as possible bond default shocks
Arguably the strongest contender to make the biggest waves in financial markets in the second half of this year are negative yields on bonds which have gradually evolved from merely a concerned thought into a desperate situation described only by the panic acquisitions of similar instruments containing positive returns regardless of the risk attached to it that could very well overshadow the scale of catastrophe when compared to the Financial Crisis of 2008/09.
Late in July I wrote a piece about the rapid transmission of funds from bonds markets in the developed world in favour of fixed income securities in emerging markets that offer the very least of a positive yield. The reason being the protracted use of monetary stimulant in the form of negative interest rate policy in countries such as Japan, Switzerland and the European Union in bid to purge economic stagnancy setting in.
At the time I concluded the absence of rationality from investors when considering all risks embedded in an instrument was an alarming notion to contemplate yet the onset of such a view has already infected the current market sentiment with disastrous consequences.
A twig of sensibility should be heeded in the latest reports coming out of Mongolia where newly elected government officials have stated their intentions to avoid default on its country's debt at all costs. This after the Mongolian bond market saw a surge in demand for its fixed income securities from positive yield seekers finding refuge from the financial storm.
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.
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.
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.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
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.
Friday, 20 May 2016
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.
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.
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.
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.
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.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
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
Friday, 8 April 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.
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.
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.
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.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
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
Thursday, 7 April 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.
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?
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.
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.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
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
Thursday, 24 March 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.
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.
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.
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.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
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.
Wednesday, 16 March 2016
Fed expected to keep rates on hold as tone closely watched
There's been a level of mutedness that has lay around global markets awaiting the Federal Reserve's decision on interest rates with expectations that hiking will be held off during this FOMC meeting after its European counterparts, the ECB spooked markets last week by painting a bleak economic outlook that could see deeper negative territory for interest rates in that region.
We heard yesterday that the Bank of Japan voted to keep measures in place fearing that any deviation might trigger a global selloff on the back of desperate actions needed to be taken by central bankers to save their respective economies from distress.
Today's Fed announcement doesn't possess speculation over whether there will be a rate increase or not but rather the pace being set. FOMC members expected to initiate four rate hikes during 2016 which many had thought to be an optimistic number that has subsequently proven true as world markets are being faced with tougher economic climates and little leeway allowing policymakers to maneuver.
I've said over the last few days that I expect the market to be tuned in to the tone Yellen strikes when it comes to the issue of negative interest rates. So far we've seen adverse reactions to what policymakers believed would spur markets on but failed to ignite the passion to drive optimism higher. These moves are leaving central bankers confused over whether to continue exploring the effects of negative interest policy or perhaps start seeking support from their fiscal partners in crime...governments.
Nonetheless we are moving closer to what I believe to be the edge of a cliff in terms of market valuations and I don't envision seeing much more support for the current bull run that recently celebrated its 7th year of existence. Unless the true facts are placed in front of the markets eyes instead of constantly being distracted away with artificial monetary stimulus that seemingly helps fade away the responsibilities by those elected to manage economic affairs in the interest of its people.
The irony of it all is it took one rate hike of 25 basis points to halt its march upwards, hardly the kind of penetrative action expected to place a drag on the economy. One would've expected a series of hikes before any kind of headwinds begin to be felt. This highlights the fragility of the US ecconomy is dealing with that just can't kickstart the growth engine so many have hoped would've eased up on the hard landing experienced by China.
We heard yesterday that the Bank of Japan voted to keep measures in place fearing that any deviation might trigger a global selloff on the back of desperate actions needed to be taken by central bankers to save their respective economies from distress.
Today's Fed announcement doesn't possess speculation over whether there will be a rate increase or not but rather the pace being set. FOMC members expected to initiate four rate hikes during 2016 which many had thought to be an optimistic number that has subsequently proven true as world markets are being faced with tougher economic climates and little leeway allowing policymakers to maneuver.
I've said over the last few days that I expect the market to be tuned in to the tone Yellen strikes when it comes to the issue of negative interest rates. So far we've seen adverse reactions to what policymakers believed would spur markets on but failed to ignite the passion to drive optimism higher. These moves are leaving central bankers confused over whether to continue exploring the effects of negative interest policy or perhaps start seeking support from their fiscal partners in crime...governments.
Nonetheless we are moving closer to what I believe to be the edge of a cliff in terms of market valuations and I don't envision seeing much more support for the current bull run that recently celebrated its 7th year of existence. Unless the true facts are placed in front of the markets eyes instead of constantly being distracted away with artificial monetary stimulus that seemingly helps fade away the responsibilities by those elected to manage economic affairs in the interest of its people.
This chart of the Dollar Index provided by Jeroen Blokland puts things into context really well. Up until the Fed has implemented an interest rate hike of 25 basis points, nothing stood in the way of upside momentum in Dollar strength. Fast forward three months after the rate has had time to work itself through the system and the Dollar is trapped in a consolidatory price range that refuses to budge.More hikes may be coming... your guide to Fed decision day https://t.co/LyydTaQ8Z0 pic.twitter.com/mQmUpst7co— Bloomberg Business (@business) March 16, 2016
The irony of it all is it took one rate hike of 25 basis points to halt its march upwards, hardly the kind of penetrative action expected to place a drag on the economy. One would've expected a series of hikes before any kind of headwinds begin to be felt. This highlights the fragility of the US ecconomy is dealing with that just can't kickstart the growth engine so many have hoped would've eased up on the hard landing experienced by China.
#USD strength is now a far less(!) compelling reason for the #Fed to postpone rate hikes. $DXY pic.twitter.com/3fwYHnBn1K— jeroen blokland (@jsblokland) March 16, 2016
Friday, 11 March 2016
Markets become fearful that Central Bankers aren't in control anymore
Yesterday I went into detail over the speculative move by the ECB to stimulate the European economy and said that Mario Draghi had a number of considerations to think about before answering questions after the announcement was made. We saw markets initial reaction quite buoyant with most European indices making a dash for the highs of the day but only to take a steep plunge once Draghi got talking.
The market somehow didn't appreciate Draghi expressing his belief that there was no longer a requirement to lower interest rates further, implying participants shouldn't expect additional measures to be put in place anytime soon. Considering the wave of stimulus the ECB added to existing measures, its understandable why such a statement like that was made yet it still didn't give the market impetus to set forth on a rally.
Perhaps the bleak economic forecasts made during yesterday's announcement gave a heads up to investors that the central bank didn't expect an improvement soon and it was implicitly introducing additional measures to avoid calamity. The sentiment shown during the ECB press conference exudes an incurring fear that maybe central bankers don't have control over the direction of the economy and negative interest rates spell disaster.
So no matter what course of action is taken the market will use such an event to sell off exposure instead of creating euphoric rallies that last for months on end. This was clearly evident a few weeks back when the Bank of Japan lowered interest rates to below zero for the first time in its history. Again the first reaction to this was positive as has been the case when stimulus is announced but then the market had second thoughts and dragged global markets lower.
What we witnessing here is a clear indication by markets that they no longer trust central bank's' ability to steer their economies in the right direction, partly the reason we've seen an amazing winning streak in gold lately but more importantly why stock markets around the world have taken a backseat while the focus has shifted to bonds.
I have said it in the past and will continue to emphasis the point that negative interest rates don't mend a broken economy. What is needed is structural reform from government's but this is becoming harder to come by as is becoming evident in the ECB decision to expand its instruments in use to corporate bonds due to the insufficient quantity available in EU government bonds. European governments have mounted up hordes of debt piles that has not only caused distress amongst credit rating agencies but severe austerity measures in place needed to cut back on the payment burden and shrinking tax base.
With government's forced to implement a contractionary fiscal policy which is in direct contrast to the expansive monetary policy set by the ECB you find defeating ends in the sense that one cancels the other out that looks to keep the EU locked in a mess for some time to come.
It's clear that policymakers have plunged worldwide markets into disarray following the waves of stimulus introduced after the onset of the Financial Crisis. What isn't certain at this point is how they are going to reverse the adverse impacts these effects are having on the sentiment of market participants and economies alike that could send an even bigger shock through the financial system than we saw in 2008. All I can say is fasten your seatbelts, we're in for a bumpy ride...
The market somehow didn't appreciate Draghi expressing his belief that there was no longer a requirement to lower interest rates further, implying participants shouldn't expect additional measures to be put in place anytime soon. Considering the wave of stimulus the ECB added to existing measures, its understandable why such a statement like that was made yet it still didn't give the market impetus to set forth on a rally.
Perhaps the bleak economic forecasts made during yesterday's announcement gave a heads up to investors that the central bank didn't expect an improvement soon and it was implicitly introducing additional measures to avoid calamity. The sentiment shown during the ECB press conference exudes an incurring fear that maybe central bankers don't have control over the direction of the economy and negative interest rates spell disaster.
So no matter what course of action is taken the market will use such an event to sell off exposure instead of creating euphoric rallies that last for months on end. This was clearly evident a few weeks back when the Bank of Japan lowered interest rates to below zero for the first time in its history. Again the first reaction to this was positive as has been the case when stimulus is announced but then the market had second thoughts and dragged global markets lower.
What we witnessing here is a clear indication by markets that they no longer trust central bank's' ability to steer their economies in the right direction, partly the reason we've seen an amazing winning streak in gold lately but more importantly why stock markets around the world have taken a backseat while the focus has shifted to bonds.
I have said it in the past and will continue to emphasis the point that negative interest rates don't mend a broken economy. What is needed is structural reform from government's but this is becoming harder to come by as is becoming evident in the ECB decision to expand its instruments in use to corporate bonds due to the insufficient quantity available in EU government bonds. European governments have mounted up hordes of debt piles that has not only caused distress amongst credit rating agencies but severe austerity measures in place needed to cut back on the payment burden and shrinking tax base.
With government's forced to implement a contractionary fiscal policy which is in direct contrast to the expansive monetary policy set by the ECB you find defeating ends in the sense that one cancels the other out that looks to keep the EU locked in a mess for some time to come.
It's clear that policymakers have plunged worldwide markets into disarray following the waves of stimulus introduced after the onset of the Financial Crisis. What isn't certain at this point is how they are going to reverse the adverse impacts these effects are having on the sentiment of market participants and economies alike that could send an even bigger shock through the financial system than we saw in 2008. All I can say is fasten your seatbelts, we're in for a bumpy ride...
Mario Draghi throws the kitchen sink at Europe’s economic distress. Again. https://t.co/E4c0iXiwl7 pic.twitter.com/fQAjP0MwW7— NYT Business (@nytimesbusiness) March 11, 2016
Thursday, 10 March 2016
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.
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.
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.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
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.
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