Just say no to equity market drugs

Given the choice between scratching out a quick post or listening to Coldplay caterwauling at halftime of the Super Bowl, Macro Man didn't really face much of a choice at all.  There is plenty of interest to discuss in financial markets, certainly more than the the ouevre of the Super Bowl halftime act can muster.

Let's start with China, where the PBOC announced over the weekend that FX reserves had fallen another $99 billion in January.   This not-insubstantial sum was met with a quelle horreur! reaction from the mainstream press, though in fact it was substantially less than that implied by the intervention estimates that have been bandied about around the street.   Not that they are mutually exclusive; there is a chance that the PBOC conducted some intervention via the forward market, which would make sense given the blowout in domestic rates last month.   Lending RMB onshore for, say, 3 months in addition to injecting liquidity might explain how quickly the rates market returned to relative normalcy after the blowout.  Perhaps we'll know in a few months.

In any event, the chart below offers a simple schematic of China's FX flows, decomposed into bank FX purchases (PBOC plus private sector), FX deposits, FDI, trade, and portfolio flows.   You can clearly see the blowout in the latter over the past year, though it is instructive to observe how it is largely offsetting prior capital inflows (which is not what one would expect from a country running a large C/A surplus.)  As noted earlier, to some degree the drawdown in FX reserves simpy represents a healthy reallocation of China's NIIP from the public to the private sectors.   In any event, nothing's gonna happen this week thanks to the lunar New Year celebrations.

Switching gears to the US, Friday's post-payroll price action was telling, insofar as it was all about the equity pain trade.  This is certainly one of those environments where what's going on under the hood is more interesting than top-level beta analysis.  Macro Man highlighted the new "equity market crack" trade of long NDX/short XLE last month; while that wasn't quite the ding-dong high it was close enough, as the spread has rolled over nicely.   An orthodox 38.2% retracement would suggest another 10-12% downside from here.

If the spread above is equity crack, then the real junkies probably go for the really hard stuff: equity market smack.  Long FANG and short GDX was a prodigious trade over the past several years, with that spread rising  more than 10-fold from Facebook's IPO in May 2012 to Thanksgiving of last year.   The high was great while it lasted, but coming down has proven to be unpleasant to say the least.  If you wanted one chart to illustrate the pain in equity space, this would be the one.   As Macro Man noted last week, GDX looks like breaking out, potentially inflicting more pain.

 Remember kids:  just because your friends do it doesn't make it right.  Just say not to drugs!