While the bear's away, the bulls will play.

While the bear's away, the bulls will play.   Such, it seems, is the lesson from yesterday, when a poor Japanese GDP figure and an unchanged RMB fix versus its basket prompted an orgiastic response across risk assets, including oil.  Notably, US markets were closed for President's Day, though of course they return today to bask in the warm glow of Goldilocks' smile.

Although the enthusiasm over the RMB fix was probably misplaced, it does seem as if something likely has changed in China.   PBOC governor Zhou's comments over the weekend about maintaining yuan stability and defeating speculators were unusually forthright, though unsurprising to anyone with much experience of watching them over the years.  It seems likely that China will try to maintain at least the illusion of stability in the currency, at least against the USD, particularly if they can simultaneously weaken in against a broader basket of currencies.  The real notable news, however, was the explosion of credit growth in January to levels that blow away anything observed in history.


Now clearly this will be meat and drink to a number of prominent China bears, who are calling for an implosion of the financial system any day now.  While it's true that China cannot continue to sustain credit growth like this ad infinitum, the latest data serves as a telling reminder that if many if not most cases in China, credit is administered via administrative diktat rather than any price mechanism.   Clearly the word has come down from on high to get credit flowing again to juice the economy; while China, like most places on Earth, is seeing a lower payoff in growth per unit of credit issued, a rise in this magnitude may well generate a boost to activity, particularly if sustained over the next few months.   We saw a similar step-jump during the great stimulus program of 2009; while many of those loans have subsequently gone bad, the time frame of the final reckoning is somewhat different when it's a government-owned or sponsored entity doing the lending.

In any event, it is perhaps an ominous sign for RMB bears that when Macro Man checked the CFETS website last night, this is what he saw:


Switching gears, the SPX looks set for a nice rally based on current futures pricing (up 175 bps at the time of writing.)  What's interesting, however, is that fixed income, while, lower, doesn't really seem to buy it.  Macro Man ran a little scatter plot study to get a sense of how extreme rates pricing is given the sell-off if equities.  The chart below plots the 2nd vs 6th eurodollar calendar spread versus the drawdown in the SPX from its highs since the beginning of last year.



As of last Friday, it's difficult to argue that the current reading (marked in red) is terribly mis-priced.  That being said, the relationship is a fairly linear one, with every percent of drawdown worth 4-5 ticks on the spread.  Obviously, there are other factors at work driving ED pricing than just the stock market, but it's pretty evident which factor was driving the bus when it came to pricing the Fed out of the equation for March.

Anyhow, if we do see the equity correction broaden out endure for more than a few hours, then segments of the fixed income market look like a chip-short short.   Of course, some people (including your author) have said that before, and been dead wrong.  Still, it's hard to argue a) that it isn't an asymmetric trade in your favour, and b) that most if not all longs have perished in a similar manner to Edward II.  If the bulls are going to play for a while, this looks like a much safer game than buying the Nikkei 1000 points off the low or anything like that....  

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Anonymous
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February 16, 2016 at 8:16 AM ×

Same old story. Equities in a correction, BOJ/PBoC panic. Asian markets and all risk assets mysteriously rise 10% on bad data while no US markets are open and liquidity is thin. Simultaneously EUR is sold off in a thin EU session.

This is just PBoC/BOJ/ECB vs Fed.

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Anonymous
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February 16, 2016 at 8:50 AM ×

Try this for CFETS website: http://www.chinamoney.com.cn/en/index.html

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Anonymous
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February 16, 2016 at 9:13 AM ×

OPEC agree to cut oil production... equities crash lol

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Cowboy
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February 16, 2016 at 10:35 AM ×

It was the 4 big producers not opec
Freeze not cut
Crude down eq down, no change in recent behaviour
Small risk rally we've had was pretty much due for correction
Think we see higher in the next couple weeks

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Anonymous
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February 16, 2016 at 11:11 AM ×

You want to see the Dax really lead this rally seeing as it the leader on way south. That's not happening to the degree I would like to see.

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knizoz
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February 16, 2016 at 11:13 AM ×

Hi guys please excuse my ignorance but what is macro man talking about with the 2nd and 6th spread? Bloomberg codes would be amazing

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Anonymous
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February 16, 2016 at 12:07 PM ×

anon 11:11
Don;t worry about the Dax. It is only falling due to EU banks, but the algos will not let it fall under yesterdays low (that gap up will be protected). EUR is also being sold to support EU equities. We will see new highs in Dax v soon.

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Anonymous
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February 16, 2016 at 12:17 PM ×

knizoz - ED2 Comdty ED6 Comdty HS

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northshore
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February 16, 2016 at 12:21 PM ×

@knizoz: Quarterly expiry months are march, june, sep, dec so today 2nd is june 16 (EDM6) and 6th is june 17 (EDM7). Spread is just the bp difference between them, an implied measure of short end curve slope and rate expectations.

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Anonymous
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February 16, 2016 at 1:38 PM ×

Thank god for HFT providing "liquidity":
https://twitter.com/nanexllc/status/699538551176736769

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washedup
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February 16, 2016 at 2:01 PM ×

MM - I agree with the main theme in the article, but that aggregate credit chart is very interesting - not directionally I guess, but the sheer magnitude is surprising - seems almost twice the late 2009 spike - is that realistic? Also, who are these loans going out to? In q408-q109 we knew the massive fiscal stimulus front loaded infrastructure projects so the credit growth made sense - I am not aware of any similar demand side measures this time around - are you?

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thegreyman
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February 16, 2016 at 2:05 PM ×

BBG: BofAML predicts Japan's pension fund buying 6.2tn yen ($54tn) of domestic stocks to achieve 25% allocation target

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thegreyman
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February 16, 2016 at 2:11 PM ×

washedup "who are these loans going out to?"

Chinese firms keep issuing debt to pay interest on their record debts

http://imgur.com/hQq8tXX

Peak insanity

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Macro Man
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February 16, 2016 at 2:12 PM ×

@washed, no I have not head of demand side measures, which makes the increase all the more surprising.

@greyman, you might want to double check your USD/JPY exchange rate there

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thegreyman
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February 16, 2016 at 2:23 PM ×

MM: That was next years figure the rate they are going :)

BBG: BofAML predicts Japan's pension fund buying 6.2tn yen ($54billion) of domestic stocks to achieve 25% allocation target

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TraderJim
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February 16, 2016 at 3:07 PM ×

@Washup

Possible that Chinese firms are raising local currency loans to repay foreign debt, seeking to get in front of further currency weakness

From ft.com
http://www.ft.com/cms/s/0/c06ce838-400d-11e5-9abe-5b335da3a90e.html#axzz40FW3YODB

"David Lubin, head of emerging markets economics at Citigroup, says about $144bn of short-term external debt has been repaid to foreign banks in the past year, with the total down from $858bn in June last year to $714bn in March this year, based on data from the Bank for International Settlements."

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AI
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February 16, 2016 at 4:15 PM ×

anon 12:07

Righty ho....Looking more like an outside down day to me.

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washedup
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February 16, 2016 at 4:50 PM ×

TraderJim - yes that makes perfect sense I see how new local currency loans swapped for dollar denominated loans would show up in this statistic. Thanks for that.

What is the end game then? I guess it all depends on the magnitude of the liabilities - the FT article is from aug last year and they were already down to $714 BN, which is basically RMB 4.5 TN give or take - since to my knowledge there is no loan growth for infrastructure or heavy industry (anecdotally) it means a big proportion of the credit spike of roughly RMB 3 TN (or $450 BN) would amount to this liability coming home.

Now, the Kyle Bass school of thought posits that the magnitude of the liability is much, much, like, orders of magnitude greater, and the BIS and FT simply don't know what they are talking about. That may be true, but I can also guarantee that IF these liabilities were owed to mainlanders instead of to fickle laowei, PBoC would be perfectly content to let NPL's get recognized at the rate of 1% per year for the next 50 years - just like old times.

To me, it adds small weight to the argument that the China story will end not with a short loud scream but with a loud protracted whimper, and a muffled one at that - we shall see.

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Anonymous
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February 16, 2016 at 5:02 PM ×

Well, if all those loan growth is for replacing the debt in USD, then the China's forex reserve decrease we observed in the past few months included both capital outflow and foreign debt repayment. Thus the problem of capital outflow has been overstated because few mentioned the USD debt repayment issues. This in turn means that PBOC has much more firepower to maintain the current exchange rate system and fight the short sellers.

So all is good and the bull is here.

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Anonymous
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February 16, 2016 at 5:25 PM ×

A monetarist's take on the China numbers:
https://www.henderson.com/ukpa/Post/12236

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abee crombie
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February 16, 2016 at 5:55 PM ×

Some thoughts in Itilian banks

http://www.horsemancapital.com/marketviews/stephen-roberts/2016/02/italian-banks

Any thoughts bond strategist or euro skeptics? I kinda like the llyods/Intesa's of Europe banking, anything away from capital markets (though I am not in love with Intesa's recent jump in Fee income as a way to generate further profits)

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hipper
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February 16, 2016 at 7:06 PM ×

DJT is over 8% off the year bottom while SPX only 3%. DJT started to fall in March 2015 while SPX in the tune of July/August. Maybe a blip but just wondering if it could mean something for commodities (i.e. demand picking up) and or if it could be anyway leading or related there. When you look at Bloomberg commodity index it kinda looks DJT began its persisting fall 2 months before. UNP up 16%, NSC 11%, CSX 12% and CNI 16% off year bottom.

Does anyone today believe in Dow theory average connections anyway?

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Bruce in Tennessee
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February 16, 2016 at 8:14 PM ×

http://www.hussmanfunds.com/wmc/wmc160215.htm

..This week Dr. Hussman dons his technician's robes in his latest column. No, he has not spotted the head and shoulders pattern. This is the dreaded left shoulder shrug pattern seen only once a decade or so.....(depends on whether you are coming or going,I suppose,could be the right shoulder shrug...)

:)

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Anonymous
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February 16, 2016 at 8:47 PM ×

Hussman presents a compelling bearish case - and has done so for the past 10 years.

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jbtfd
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February 16, 2016 at 10:56 PM ×

This has been the best 2-day gain in US equities since Aug 2015.

We now have a major double-bottom at the 2015/2016 lows - this support line will not be allowed to fail (if it does, central banks etc will step in). I now expect a rally back up to 2015 highs in US equities. From there, we will see new all-time highs.

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abee crombie
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February 17, 2016 at 3:12 AM ×

Welcome to no mans land in the markets .. 1 week its the PBoC, next its the Yen, and then Euro banks. Cant wait to see what is the next focus for the markets?

I do wonder what the heck is going on in China. If those new loans are going to pay off old ones, or something else bc i dont think "industry or investment" like in 2010 is leading the charge in economic activity..

Dax still below 9300 isnt so bullish. A close about it this week would be a good sign

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Bigtail
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February 18, 2016 at 5:47 PM ×

MM: As we know, China has a controlled FX regime. Sputtering out massive amounts of credit, which are poured into negative to low yielding projects, as well as feeding an ever larger extreme debt mountain ridge will just lead to reduced competitiveness. and with the currency tied to the world currency,,, the pressure builds as ever more debt sours.
50% deval, anyone?

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