Here are 3 thoughts to start what's shaping up to be a pretty big week:
* The IMF board votes today on whether to include the RMB in the SDR, and while it would certainly be amusing if they turned it down such a likelihood is beyond remote. While one can argue whether the RMB ought to be in the SDR, it is largely academic that it will be. Although Macro Man remains generally sceptical that this inclusion will result in a big inflow into RMB, there is a school of thought that global reserve managers will allocate some portion of their baskets into Chinese currency, causing a substantial inflow.
Leaving aside questions regarding the wisdom of keeping substantial sums in illiquid, managed markets for "safety", is it really the case that reserve managers try to mimic the SDR? The short answer is kind of....but not really. In the latest IMF COFER data, the share of allocated reserves represents some 58% of the total....and at least a small portion of that is China itself. Anyhow, we can examine the weights of the allocated (i.e., reported) reserves and compare them with those of the SDR basket. What we find, unsurprisingly, is that the USD is over-weighted in reserve baskets relative to its SDR weighting, and everything else is under-weighted. It seems virtually impossible to believe that China wouldn't receive the same treatment.
Even if one makes the heroic assumption that the RMB weight in reserve baskets equals that of the JPY in five years, the figures just aren't that impressive. A 4% (rounded) reserve allocation on $8 trillion of non-Chinese FX reserves is equivalent to $320 billion, or $64 billion per year. That's a little more than $5 billion per month....a drop in the bucket compared to monthly trade surpluses of $60 billion and capital outflows of $100 billion+ in recent months. Pardon Macro Man as he stifles a yawn.
In any event, the market is decidedly unimpressed at the moment. USD/CNH has drifted steadily higher in recent weeks, retracing nearly 50% of the sell-off from the post-deval highs to the recent lows. While Macro Man wouldn't necessarily advocate going short, he would concede that at least some of the easy money has been made in being long USD/CNH. Better to ring the register a bit and wait for a dip below 6.40 to top up the position.
* Yet again we find ourselves near the top of the range in Spooz. As vocal as the JBTFD crowd has been, JSTFR has worked just as well (better, actually, given that the range break came to the downside), albeit with fewer trumpets blaring the call to action. We have Yellen and payrolls this week, and it's difficult to see them being overtly supportive for stocks (i.e., the only number bad enough to turn lift-off expectations would surely be bad enough to lead to growth worries, if such an outcome is possible from one poxy number.) On the other hand, we have Santa and his magic fairy dust that turns the credit market temporarily invisible...though at this juncture it's impossible to know if he's using the industrial-strength stuff that lasts for several quarters or the cheap petrol-station grade that starts wearing off in a few days or weeks. Regardless, it seems more likely to happen at the top of the equity range....
* Fixed income has continued to retrace, wiping out all of the losses since the last payroll report even as equities have also clawed back a majority of their losses. it's really interesting to observe, however, how much the strip has outperformed Treasuries. The chart below shows the 10 year note future with EDH8 overlaid as a blue line. It looks very very similar, actually, almost regardless of which Treasury or eurodollar you choose.
The culprit is obviously the collapsing swap spreads, and while the dynamic there is certainly messy it seems reasonably clear that regulatory issues are playing at least some part in driving spreads. The upshot is that it's very difficult to say that "fixed income looks oversold/overbought/whatever", as spreads are driving a lot of the dynamics that we can observe when looking at a single price.
* The IMF board votes today on whether to include the RMB in the SDR, and while it would certainly be amusing if they turned it down such a likelihood is beyond remote. While one can argue whether the RMB ought to be in the SDR, it is largely academic that it will be. Although Macro Man remains generally sceptical that this inclusion will result in a big inflow into RMB, there is a school of thought that global reserve managers will allocate some portion of their baskets into Chinese currency, causing a substantial inflow.
Leaving aside questions regarding the wisdom of keeping substantial sums in illiquid, managed markets for "safety", is it really the case that reserve managers try to mimic the SDR? The short answer is kind of....but not really. In the latest IMF COFER data, the share of allocated reserves represents some 58% of the total....and at least a small portion of that is China itself. Anyhow, we can examine the weights of the allocated (i.e., reported) reserves and compare them with those of the SDR basket. What we find, unsurprisingly, is that the USD is over-weighted in reserve baskets relative to its SDR weighting, and everything else is under-weighted. It seems virtually impossible to believe that China wouldn't receive the same treatment.
Even if one makes the heroic assumption that the RMB weight in reserve baskets equals that of the JPY in five years, the figures just aren't that impressive. A 4% (rounded) reserve allocation on $8 trillion of non-Chinese FX reserves is equivalent to $320 billion, or $64 billion per year. That's a little more than $5 billion per month....a drop in the bucket compared to monthly trade surpluses of $60 billion and capital outflows of $100 billion+ in recent months. Pardon Macro Man as he stifles a yawn.
In any event, the market is decidedly unimpressed at the moment. USD/CNH has drifted steadily higher in recent weeks, retracing nearly 50% of the sell-off from the post-deval highs to the recent lows. While Macro Man wouldn't necessarily advocate going short, he would concede that at least some of the easy money has been made in being long USD/CNH. Better to ring the register a bit and wait for a dip below 6.40 to top up the position.
* Yet again we find ourselves near the top of the range in Spooz. As vocal as the JBTFD crowd has been, JSTFR has worked just as well (better, actually, given that the range break came to the downside), albeit with fewer trumpets blaring the call to action. We have Yellen and payrolls this week, and it's difficult to see them being overtly supportive for stocks (i.e., the only number bad enough to turn lift-off expectations would surely be bad enough to lead to growth worries, if such an outcome is possible from one poxy number.) On the other hand, we have Santa and his magic fairy dust that turns the credit market temporarily invisible...though at this juncture it's impossible to know if he's using the industrial-strength stuff that lasts for several quarters or the cheap petrol-station grade that starts wearing off in a few days or weeks. Regardless, it seems more likely to happen at the top of the equity range....
* Fixed income has continued to retrace, wiping out all of the losses since the last payroll report even as equities have also clawed back a majority of their losses. it's really interesting to observe, however, how much the strip has outperformed Treasuries. The chart below shows the 10 year note future with EDH8 overlaid as a blue line. It looks very very similar, actually, almost regardless of which Treasury or eurodollar you choose.
20 comments
Click here for comments"The world’s biggest pension fund posted its worst quarterly loss since at least 2008 after a global stock rout in August and September wiped $64 billion off the Japanese asset manager’s investments.
ReplyThe 135.1 trillion yen ($1.1 trillion) Government Pension Investment Fund lost 5.6 percent last quarter as the value of its holdings declined by 7.9 trillion yen, according to documents released Monday in Tokyo. That’s the biggest percentage drop in comparable data starting from April 2008. The fund lost 8 trillion yen on its domestic and foreign equities and 241 billion yen on overseas debt, while Japanese bonds handed GPIF a 302 billion yen gain.
The loss was GPIF’s first since doubling its allocation to stocks and reducing debt last October, and highlights the risk of sharp short-term losses that come with the fund’s more aggressive investment style. Fund executives have argued that holding more shares and foreign assets is a better approach as Prime Minister Shinzo Abe seeks to spur inflation that would erode the purchasing power of bonds."
from bloomy. you gotta love the last paragraph
JBTFD in EU equities is the way to go (as I have been saying since Dax 10500). Dax massively bid again today on the back of central bank buying, up +120 points in the first hour. Santa has come early folks.
ReplyJust buy european equities, european bonds. Sell oil, sell the euro.
ReplySo that's how it's done! What could possibly go wrong.
"Just buy european equities... What could possibly go wrong."
ReplyApparently not much with the BOJ supporting all equity bids. There are times when QE is free money. This is one of them.
BOJ's Kuroda: Will do 'whatever it takes':
Reply"Pushing up prices alone will be meaningless, so let's wait until wages increase--this is not the way I am thinking," Mr. Kuroda said at a news conference in Nagoya, central Japan. "If it is judged as difficult to achieve the 2% price stability target at the earliest possible time, we will do whatever it takes, including additional monetary easing."
Jawboning aside, it is a little difficult to see either Kuroda or Draghi committing to additional easing right here. While these CB statements indicate a continued willingness to stay easy in terms of monetary policy, this is not the time to press hard on the accelerator, and they will both desist from doing so at present. There are a few reasons for this. Firstly, the higher dollar is clearly already beginning to choke off the recovery in the US and at the same time threatening to precipitate a credit crisis and/or currency crash in a variety of vulnerable emerging market areas (peripheral Asia and Latin America come to mind).
ReplyAdmittedly in FX markets what traders think CBs will do can be as important as their actions, but a great deal of easing by CBs other than the Fed is already priced in here, while recent market moves have priced in the near certainty of a Dec rate hike by the Fed. We would remind everyone that it is not that long ago that GBP resembled the current USD and markets were on the edge of their seats every month awaiting the BoE rate hike. Should renewed weakness appear in US labor markets, resulting in the Fed "Doing a Carney" (huffing and puffing but never actually getting around to it) then the resulting reversal of the recent love fest for all things USD-denominated will be swift and quite ruthless. Just my 2p...
We raise this possibility not to argue strongly against a December hike, but only to alert punters to the fact that anecdotal observations suggest that US consumers are barely ticking over here, certainly not charging into the stores, and that this is true even in the hottest coastal areas where the US might be considered to be booming. This may be considered more than a bit odd in view of the consensus view that lower gasoline prices help the US consumer. We suggest that the usual culprits are at work: continued wage stagnation, demographic changes in consumer behavior, and the pernicious effects of "hidden inflation", mainly in terms of rapidly rising rents for younger and less wealthy Americans.
Beware those lofty expectations about US liftoff and the return of 4% growth. In the New Normal, 2% is the new Hot Expansion. Should the Fed accede to market demands and expectations here with a 25bp hike, we think it is very likely to be the last for some time as the US economy shows many signs of slowing down as we enter the winter months. The language of the December statement may well indicate such concerns going forward. For this reason, consider us well and truly members of the One and Done club for the time being. We also think that One and Done will trigger an unwinding of some of the recent enthusiasm for USD, and that this creates tremendous opportunities for a Q1 rally in commodities, emerging market bonds and equities, US long bonds, US mREITs and other vehicles that are perceived to benefit from "lower for longer". Yes, we know this is the same call we made for September, but the delays that have occurred really serve to prove my point.
Apologies for long-windedness here, LB suffered a rare attack of early morning lucidity.
I see SDR's as like Bitcoin. They are a payment method rather than a currency.
ReplyMany many moons ago I had the UK Post Office as an FX client. All international postal payments are net settled through SDR, this was agreed by treaty between 150+ countries and so, as they said, was very unlikely to change due to the number of those involved, however inconvenient this payment system was. But the point is that when payemnts were made the baskets were bought by the payer and then sold pretty much immeadiately by the reciever. Eg, if UK PO paying South Africa net, then UK pays them a component of JPY which they have no use off and switch to ZAR on receipt. Hedging future payments on a global basis would also net off to flat. So much like Bitcoin, the only time you actually need to own it is for the microcosm of time between it being bought, paid and resold again. It was a payment system not a reserve currency.
I cannot see why anyone would suddenly decide that if CNY becomes part of SDR they would want to hoover it up. Yes it may be included in payments but that should net off and hedges in SDR should be unidirectional and also net out.
I am aboard the EU equities trade, however pondering if they can still go up if EURO doesnt weaken. I am not sure how much lower the Euro is going here. But like Japan managed to do, I think EZ will be able to do it. Looking for more negative rate moves by Draghi, if not it would be a disappointment and with Euro already lining up for a Demark type move, I would get out of the way
ReplyLB, i think we get to 1% before the Fed has to take stop, though consumer spending is pretty odd, but contrast that with car sales and new home sales.
My view:
Reply- ECB lowers rates and announces more QE (including direct purchase of equities and corp bonds)
- BOJ announces MASSIVE QE including MASSIVE purchases of equities
- Fed delays rate hike due to poor data (meaning the USD is too high and it's hurting US corp profits)
In other words, central banks double-down.
Swiss 10-year yield hits new low of -0.41% SNB...interest rates to a record low of -0.75 per cent.
ReplyEmerging-market corporate debt now totals $23.7 trillion.
$600 billion of debt maturing 2016...$85 billion is dollar-denominated.
I see numbers like this, I feel warm all over. This is really great.
German 5y yields drop below -0.2% for first time ever.
ReplyLB, in re consumption it can be instructive to strip out health care. Viz for illustration https://research.stlouisfed.org/fred2/graph/?g=2Lbm which deflates and adjusts for population. While certainly not great, yoy numbers continue to look new-normal adequate.
ReplySocialist Utopia In Europe:
Replyhttp://www.zerohedge.com/news/2015-11-30/sweden-no-apartments-no-jobs-no-shopping-without-gun
@abee I think the Japan example is a bit inapplicable to the EZ because there really isn't an entity like the GPIF that spans multiple jurisdictions - owning corporate credit will eventually be a step I expect them to take, but there is very little evidence right now that the plumbing is clogged up because high quality companies can't borrow in Europe.
ReplyI just expect jawboning - for whatever reason the markets adore Draghi's jaw movements, so that's that. I am with you on the inverse correlation between euro and EZ equities - at some point the policy divergence will get priced in, and then - what? they'll keep selling euro because sell side banks said so, even though there is a decent chance europe may currently be growing faster than the US?
Could be an interesting week..
Today's fiction report...
Reply"By a unanimous vote, the Fed approved rules limiting lending to help specific “too-big-to-fail” firms that are in trouble as it did in the last financial crisis with loans to Bear Stearns and American International Group."
Can't stop laughing.
Steen Jakobsen, Saxo Bank:
Reply"Markets have reached a general consensus that the Federal Reserve will raise interest rates in December and that this move will spur the US dollar to new heights and the euro below parity with it – a level last seen in 2000 when the IT bubble topped. However, there is good reason to be a bit sceptical on this expectation. The dollar has as a matter of fact peaked on the day of the first rate hike during five out of the last six rate hike cycles. The strength of the dollar appears to be inversely proportional with the direction of US interest rates."
"The irony is that if the history of a weaker dollar does not repeat then we know for sure what the outcome will be: a global recession, lower commodity prices, deflation, and another margin call. Only this time on the entire world economy and not only emerging markets."
https://www.tradingfloor.com/posts/read-your-history-the-dollar-will-fall-after-the-hike-6655960
Morgan Stanley to Cut a Quarter of Bond, Currency Trading Jobs
ReplyMorgan Stanley plans to slash hundreds of jobs from its debt and currencies division after a monthslong slump in trading revenue forced the Wall Street firm to revisit its staffing needs, people familiar with the matter said
Anon 9:12 a.k.a. funny money
Replyfrom previous thread i heard we are now working together
well done if you are long Dax since 10500 stop inviting others, don't be a greedy pig and trail your profit this triple whammy [EU 'least ugly' allocation + Draghi event + Santa] is the most crowded trade of the year so we can expect all buyers to be in by Thursday. As a contrarian i'd be wary of a brutal reversal.
from 2023 spoos and Nov16 stoxx short cover am chuffed to reenter this week shorting 20 stoxx and 5 Emini every day and will switch off platform until mid January for a good old ostrich trade. Screw Santa. I am completely flat USD still can't see EUR parity (lasting longer than sensational headlines) the crowded short EUR trade has been mentioned many times at team MacRo
Happy trading everyone, whoever missed the 2009-2015 rally will get a very nice entry next year under 1700 spoos
@Nico - You make a good point. I closed my entire line in Dax following the poor reaction to PMI data this morning (avg price 11375 FDAX Z5). I am tempted to short some here too, but will hold fire for now.
ReplyGetting away from USD pairs this week, I think aud.cad is at a nice level to short from (0.97 and above).
Reply