Is China playing silly buggers again? Macro Man attempts to answer the question in eight charts:
1) As you're no doubt aware, Chinese FX reserves suffered their largest drawdown since January last month
2) Meanwhile, the CFETS basket continues to weaken like there's no tomorrow; last night's fixing reached a new nadir, breaking below 96 (MM calculations) for the first time
3) Although ongoing weakness of the USD after payrolls is a possible explanatory variable, the fact is is that the basket's correlation to the dollar has been relatively low recently
4) Of course, it's preferable to calculate correlations using returns, but given the temporal difference in data (CFETS fixing for the basket, the following NY day's close for the DXY), it's probably not that surprising that the return correlation trends around zero.
5) If you ever needed convincing that the Chinese FX regime changed last year, check out the CFETS basket regressed vs the DXY using coefficients calculated from 2015 data. Observe how close the fit was before August of 2015, and how unclose it was afterwards.
6) Putting the shoe on the other foot, if we calculate the regression using 2016 data, we see a nice fit for this year but a lousy one for last year.
7) Even for this year though, something seems to have changed recently. Notice how unresponsive the CFETS basket was to the DXY bounce, but how responsive it's been during the relapse.
8) If we plot the error terms of the 2016 regression, we can see a clear deterioration over the last several weeks.
Conclusion: China is playing silly buggers again, weakening the CNY essentially regardless of what other currencies do. If USD strength starts to reassert itself, this suggests that significant upside pressure will probably re-emerge in USD/CNH, with a concomitant narrative about capital outflows again.
Watch this space.
1) As you're no doubt aware, Chinese FX reserves suffered their largest drawdown since January last month
2) Meanwhile, the CFETS basket continues to weaken like there's no tomorrow; last night's fixing reached a new nadir, breaking below 96 (MM calculations) for the first time
5) If you ever needed convincing that the Chinese FX regime changed last year, check out the CFETS basket regressed vs the DXY using coefficients calculated from 2015 data. Observe how close the fit was before August of 2015, and how unclose it was afterwards.
6) Putting the shoe on the other foot, if we calculate the regression using 2016 data, we see a nice fit for this year but a lousy one for last year.
8) If we plot the error terms of the 2016 regression, we can see a clear deterioration over the last several weeks.
Conclusion: China is playing silly buggers again, weakening the CNY essentially regardless of what other currencies do. If USD strength starts to reassert itself, this suggests that significant upside pressure will probably re-emerge in USD/CNH, with a concomitant narrative about capital outflows again.
Watch this space.
40 comments
Click here for commentsWould certainly appear so - appears that credit growth and perhaps more importantly some real estate metrics rolled in May too. Perhaps this is where the next round of "easing" comes from in the mainland?
ReplyCNY fixing is gradually corralling the Fed.
ReplyJack Lew's comments were political and misleading: "China's latest interventions have been aimed at supporting the yuan's value, not pushing it down." Surely the intervention was primarily focused on reducing the CNY/CNH spread given that CNY is fixed daily.
Fed hike probability greater than 50% will surely see new highs in USDCNY/CNH and likely growth of the spread... a half decent NFP result a likely trigger. Next Janet will be mentioning disorderly devaluation again.
There is no room for the Fed to manoeuvre per the China design. The trap is obvious but still may be ultimately triggered.
http://www.marctomarket.com/2016/06/faq-ecbs-corporate-bond-buying-program.html
ReplyWhat is the impact on US corporate bonds? US corporate bond issuance has increased, and the premium over Treasuries has fallen. Foreign investors have been moving into the US corporate bonds market. A decade ago, foreign investors reportedly owned about a quarter of US corporate bonds. Now they hold a little more than a third. US corporates have been issuing euro-denominated bonds. They issued a record amount last year and are on a similar pace this year.
...Truly a different era...central banks now backstopping everything....and why wouldn't the rate of share buybacks be increasing?
Crude oil going up every day on a new "Nigerian incident", Cushing full to the brim, supertankers parked everywhere full of oil, China telling all kinds of porkies about its economy, vol sellers mindlessly selling vol, trashy assets, unicorns and various emerging markups levitating quietly every day - it's all so Summer of 2008.... and I don't say that lightly.
ReplyOf course the differences are in credit: negative yields in govies everywhere. This time, Bucky may be the only safe haven.
http://blogs.cfr.org/setser/2016/06/07/chinas-may-reserves/
ReplyCertainly looks like a regime change, MM. However, reserve losses net of valuation effects still appear to be subsiding. Here's how JPM has calculated it:
Reply"If adjusted for the valuation effect (DXY appreciated from 93.1 to 95.9 in May, which will lead to a valuation loss of about $32.4 billion in our estimate), FX reserves would have risen moderately by $4.4 billion in May (reflecting the magnitude of FX intervention), compared to the fall at $9.9 billion in April and $29.1 billion in March."
This mkts are at the same times totally crazy and totally cinic... maximum divergences between asset classes and areas/sectors... but agreeing with LB: this environment it's scaring me a lot too.. I'm feeling the smells of huge undeperformance (if not full losses) in many desks.
Replymy canary is well flagged today!
@left/TBS/Corey/Nico - I couldn't agree more - I smell napalm in the air. If my two decades worth of shoveling sh@t mean anything at all (Nico is that spot still open?), its that when faced with a dichotomy between what risky assets are telling you vs govt bonds, go with the latter every time.
Replywashed, normally I would agree with you, except your two decades correspond to a raging bull market in gov't bonds, and there are just a lot of people who cannot see a future where growth solidifies and rates rise. I'm not being a polyanna, it's just that the reason most people are blindsided is that they truly have a blind side.
ReplyHearing you all still bearish on risk assets (esp equities and crude) makes me want to go out and buy 5x more ;)
ReplySPX will be at 2200 before you know it. Crude is gonna prove everyone wrong (because that's what it does). I am long risk - forever.
@anon 4:38 - interesting you say that, because to me low interest rates seem to be routinely cited as the reason to buy equities. Also, I wasn't making a bullish call on bonds because I've only seen them go up, merely pointing out that they have significantly diverged from risky assets and that disconnect tends to not last very long - you think that gap will close by bonds falling, fine.
Reply@anon 4:51 - be my guest.
re washed- ill add my 2 decades as well and say this us equity melt up is going to end bad....watch for close today- ...i have bought a far amount of iwm puts here....
Replyyou can sell 'long risk forever' name to the James Bond franchise it is just fantastic
Reply“With equities at the upper end of their recent range, we believe equities offer poor asymmetry with little return potential and potential for more frequent and larger drawdowns,” writes Mueller-Glissmann. “And while ‘buying the dip’ has worked since 2014 , investors are increasingly concerned about the recovery catalyst in the next drawdown as central bank capacity is increasingly questioned and global growth and inflation remain stubbornly low.”
Replytoday at Goldman
Interesting comments the past few days regarding volatility and the melt up. Basically that as long as we have little or no vol, TINA rules. Of course there will be vol again at some point and then all shit breaks loose. But hard to predict when. My guess is to look at bund hitting -0.05 or so.
ReplyFrom Trahan, whom if you recall I put out some postings earlier in the year and pretty much called the Feb bottom
For much of the year, we’ve highlighted how the market’s returns have been driven mainly by changes in investor sentiment towards global risks, which manifested itself through the P/E component of the equity equation. Now that we’re about three months or so past the trough in markets and other leading indicators of economic growth, we are beginning to see earnings positively contribute to market returns. Throughout much of 2014 and 2015, S&P 500 earnings declined on the back of two powerful headwinds – lower commodity prices and a stronger USD. Now, not only are we beginning to see the positive impact of lower costs (i.e., stronger consumer spending), we’re also seeing those past headwinds become tailwinds to overall EPS. Higher oil prices have lifted the market since the lows in February mostly through risk reduction around the world (lower credit spreads, lower CDS, etc.) and are now also lifting EPS from overly-extrapolated downside numbers.
The best market returns come when both EPS and P/Es are rising. That’s where we are today. The risk to a continuation of this story is figuring out when P/Es will peak as higher oil prices go from being a solution to a problem for financial markets. We still think we’re several months away from that still … so ride the recovery-wave while it lasts - it’s unlikely to be pretty when it curls and eventually crashes. Still bullish!
Avi i sincerely hope you are not following this bullshit
ReplySo the bearish view is solidly consensus then. Congrats to all!
Reply@abee - on 'so ride the recovery-wave while it lasts - it’s unlikely to be pretty when it curls and eventually crashes. Still bullish'
ReplyI had to read the paragraph about 5 times - Trahan is a smart dude, but is his audience now 5 minute punters? Since when is it sound advice to say 'ride the wave' to people who have to go to investment committees to get approval for changing portfolio composition (AL any thoughts?)
He could be very right in his ST call of course, but if you happen to know what his upside for the wave riding vs the downside for 'when it curls' is, it would be good to know, and probably relevant to decision making in a market which is trading at 13 vol.
re abee 543- as far as spoos and iwm go i only see p/e increasing - 1y fwd eps is lower than a year ago. and this usd and oil story is just that a story. revenues are going down and margins have topped out , guidance still negative. Forward returns looks pathetic here and TINA is always heard near the top. For myself I'm not perma anything - have trade long/short this year but risk reward to slot this looks pretty good and given vol levels going into key events could make your year here
Replywashed, if rates go up it will be because growth has picked up. if that occurs profits will eventually follow, and valuations will improve. the next few rate increases at these low levels shouldn't hurt equities, especially if the economy is firming. As i recall in the summer of 2008, GS was bullish, allocations to equities were higher, and fear was not the order of the day. today GS is warning of large equity drawdowns, funds are under allocated, everyone (except for the anon 4:51's who can be my guest as well) is scared to death, so as usual i don't agree with LB's sentiments there. what would draw the ire and angst of most would be a boring, grinding summer with a gradual recovery of global growth and Ms Yellen doing exactly what she said she will without causing equities to fall much, while inflicting significant pain to bondholders and bond proxies. if i didn't think that was at least possible, it would certainly equate to a blind side.
Reply@anon on "if rates go up it will be because growth has picked up. if that occurs profits will eventually follow," this is one of those statements that sound perfectly logical, but there are many embedded assumptions in there - I strongly encourage you to consider alternate scenarios, such as ones where productivity declines, wages finally creep up, the world gets re-acquainted with stagflation lite etc etc.
ReplyI don't know about you, but I see multiple possibilities and margin compression in the face of tepid growth is by far THE biggest blindspot investors have today - it is by far bigger than the one that gets thrown at us (thereby proving its not much of a blindspot) by TV pundits and bloggers alike, namely that everyone is bearish so markets will go up.
Is everyone really bearish? How about this guy?
http://www.cnbc.com/2016/03/31/tom-lee-when-and-why-i-expect-new-stock-records.html
Or this guy:
http://www.cnbc.com/2016/04/11/pro-talks-investment-strategy-with-jeffrey-saut.html
And this guy:
http://www.cnbc.com/2016/04/20/jim-paulsen-sees-record-2200-for-sp-heres-why.html
Also - if everyone is bearish and pessimistic I would again like to know, who have they been selling to, and why are fund flows assumed to be mean reverting.
Thanks for everyones thts - trust me if we are headed to 2200 I know exactly how to make money in that state of the world! Just figuring out probabilities like the other punters here.
Indeed washed. Setting up a strategic positioning of a portfolio just on assumed positioning of the market is a very dangerous game. I'd rather set the investment case on facts both on a top-down as well as bottom-up basis. This has been done already back in April and will not change on a turn of a dime.... And certainly not before a binary event like the Brexit referendum.
ReplyAnd watch out liquidity .... This can dry up very, very quickly.
PS. Welcome back Nemo, unless mistaken it's been a while.
BoJ warning of event risk
ReplyJPM & GS warning on equities
Deutsche Bank slamming ECB
Commerzbank considering holding cash outside ECB
Banco Popular offering loans on condition of joining rights purchase.
Italian NPL's
China devalue
Just when I was starting to think we were going higher, for no other reason than price is bid. The banks have caught my interest.
Thing about a real price shock is it's unlikely to be the SWFunds or China that step in to buy. They were margin sellers on the last two price shocks. Pensions and Hfunds stepped in last time. Not so sure who'll do it next.
"Well the bearish view is solidly consensus" ...Whoa, whoa whoa there. Surely the market is f'ed, but the problem with market insanity is not that it lasts longer than your solvency, rather that it's irrational and therefore trying to subject it to the laws of probability will only cause you to lose your own sanity. This is where I'm at, somewhere btw amps and nico with some funnymoney on the side. Its funny to hear others criticize others who have holding periods shorter than what they would deem morally acceptable. We've all been forced by the Fed to invest like a sort of gorilla warefare. Hit and run and try not to get hit yourself. Unfortunate for us we chose this vocation because it was intellectually stimulating - no more. I give up and give in. Both hands off the wheel and petal to the metal with eyes closed. Nope, not for me. Not going to play that game. Not going to waste one more neuron doing analysis on the unanalyzable. Neither bull nor bear - agnostic, bordering on nihilistic. I'll let the robots hash it out.
ReplyWhen enough players come around to that conclusion then you will know we are at the end. And it doesnt have to crash necessarily when we get there. It just has to cease to function as an efficient allocator of capital at arms length between buyers and sellers. How bout equities at a permanently higher plateau where the only return outside the range is the divy. No bubbles in sight. Wake me when utilities are selling at 40x.
@corey: sensibile considerations.. Can understand.. it's frustrating, in particolar when money flows out... we risk to be right with no Aum
Reply"well the bearish view is consensus"...
ReplyAgree with Corey, Consensus my arse. Surely this is utter sophistry, pure and simple. Look, let's remember here that there are all these millions and millions of passive punters who are long every day, and they never ever even think about the market at all until it dumps and Cramer does the spooky noises on his show. Yet by their very indifference to the market they are bullish, no? That group only ever gets bearish at the bottom, remember. There is NO bearish consensus. Nonsense.
What you are talking about is the current mood of the swing traders, the value funds and the long/short funds, the macro punters etc.. b/c whatever our self-styled investment philosophy may be, we are all simply slowly losing our minds....
"That's me in the corner
That's me in the spotlight
Losing my religion..."
I think a lot of value investors ARE completely losing their minds here, b/c value isn't rallying here, only trash. We still have longs, for example, and they aren't going anywhere at all, apart from a few emerging market names. This worries us, b/c when the market falls after these slow low volume grind ups, everything is sold by robots, trash or value, and so we have been reducing length, bit by bit, day by day, in Europe, emerging markets and REIT common shares.
Embedded in the portfolio we have a number of small bearish vehicles that have gone, or are going, pear-shaped. From time to time we add to the pile, moving to longer-dated instruments as we go. The process is familiar, resembling the action around other rounding tops like 2000, 2007-2008. The details of the key bubble ingredients (tech, housing, central banks) are different but the event always plays out the same way once the last buyer has checked in to the roach motel.
Dame Janet saw the JOLTS report today, she loves the JOLTS, and it was really quite innocuous. She knows that she can still hike in July, which is what they have been telling us, but she will leave it a bit late to signal it b/c of possible Brexit risk. Should the Brexit polls turn toward BREMAIN, look for Dame Janet to indicate earlier that everything is coming up roses.
Bulls should also bear in mind that BoJ never hiked - and the Nikkei just tanked repeatedly anyway b/c of poor growth and earnings. Remember that once deep selling begins and liquidity dries up, leveraged longs don't debate the niceties of whether this reflects elevated multiples, declining earnings or tighter Fed policy, they just crap their pants as soon as it is clear that risk is offered and will ultimately sell at any price.
Nico, brah, i think the difference is just you are trading EU and I am not. Spoo's will crash eventually, so what. For now it looks like we going for new highs. Look at the charts and tell me differently ... range test failed on the downside, now we go to test the range on the upside. I'll change my tune when we hold below 200 day. I'm not smart enough to pick tops and bottoms, I like to make things easy for myself as I get older.
ReplyA simple description of what is happening during the distribution phase that is common at the end of this type of rally:
Replyhttp://www.marketwatch.com/story/volume-patterns-suggest-weakness-not-strength-in-this-rally-2016-06-08
The relentless buying of the spoos reminds me of the scene in the movie "On the Beach". A mysterious radio signal originating from the city of Seattle, Washington is detected in Australia in a world ravaged by nuclear war. Everyone is dying. A nuclear sub is sent to determine who is transmitting the signal. The mysterious radio signal is later determined to be the result of a broken window sash swinging in the breeze and occasionally hitting a telegraph key.
ReplyHas some rogue HFT shop been laid to waste and the window left open? Something happen at the Fed?
Marc Chandler with a sensible piece here on the timing of Fed moves during election years. No, Jemima, September is NOT too close to the election for a rate hike. We have had August, September and even October moves in prior cycles.
Replyhttp://www.marctomarket.com/2016/06/presidential-elections-and-fed-policy.html
Bucky may be in a real sweet spot here. Better US data, Fed jawbones and then hikes rates, equities, commodities and EM FX are slaughtered, dollar rallies strongly. Soft US data, falling profits, lower margins, earnings slide, equities sell off, dollar rallies strongly. US recession, earnings plummet, equities, commodities and EM FX are slaughtered, dollar (and yen) rally strongly.
Just my $0.02....
Anon 4:51 here (Long Risk - Forever!)
Reply@Nico: re: 007 titles - made me smile :)
@Everyone else:
US equities close nr HOD, crude pushing higher... I know it's nonsensical and the markets are being driven higher by fckwits (myself included) but the algos are not letting this stuff fall (Christ knows why...). So I remain long risk forever. Yours, Anon451.
Anon451 thx for your useful views..we'll take care, you're the biggest winner, no doubt! Enjoy it! Why don't use futures to leverage x10?
ReplyA451
ReplyHedging has started - gold and silver.
Someone is going short risk.
@TBS - lol thx, I wish I was the biggest winner - then I could surround myself in semi-naked women of dubious moral-character and not have to trade these lame excuses for fin mkts. Unfortunately my Bond-esque moment will have to wait...
ReplyMy posts above being somewhat tongue-in-cheek, I basically expect a low vol, annoying upward drift in equity indexes interspersed with a few minor pullbacks (so more of the same). I also expect further USD depreciation, thus higher commodities etc. All v boring really. I hope I'm wrong and we see a Jan/Feb-style meltdown. Do wake me up if it happens...
I think my point was that I'm too frustrated to be bullish or bearish (and certainly too indignant to give a rats ass about what J.Yell or any other CB will do) but consensus here is clearly bearish.
ReplyI no longer pretend to think I know anything about what will happen, nor does it matter. Markets are up. Cant say I'm bullish bc there is no logic in markets going up other than this has got to be one of the most hated rallys. If I were foolish enough to think I could call what the markets were about to do I would put 10 on bull trap just because enough of the smart money has yet to be lobotomized. Needs at least another month.
Can't say I'm bearish either although this is clearly the favorite sentiment of my left-brain. I am smart enough to realize that in this game even damn fools can look like geniuses for longer than you can take the intellectual high ground, so I won't pretend to.
So what does this make me? I suppose a reluctant long. Long cash, long bonds, long stocks, long gold and long diapers.
So everyone's bearish- I guess you know everyone then
ReplyPeople maybe talking bearish but positioning is anything but.long only is there , futs leaning long and puts for sale . Sure we might get a new high - who cares??
The bigger move here is down and probably fast.
Was a good idea to not sell into the hole at 1800 eArlier and this feels the mirror image- we'll see
I think I said consensus here is bearish. And since 1800 is lower than where we are I think that would make u a bear too.
ReplyNew highs after an extended range usually do matter
Hey it's entirely possible for everyone to be bearish and markets to grind up. Last time I checked retail and professional fund flows have been negative and every bank is pushing clients underweight.
ReplyBut corporates are on the other side ... see RIO 3b buyback announcement last week, or Apple buying single digit %s of its market cap every quarter. These are not small trades and they're permanent.
http://www.bloomberg.com/news/articles/2016-06-07/rio-tinto-starts-3-billion-bond-buyback-amid-commodities-pickup
On the flip side IPO volumes are too low to suck up cash from long only, and sectors in distress aren't forced to raise capital as per financials are when they're in crisis. IPO volumes are at 2009 levels according to some chart.
So we're in a sweet (or sour) spot where corporates are buying shares but not selling them.
On the long side... energy and commodities shares could rally on small rises in commodities due to heavy cost cutting, tech and biotech could take new heights all while total share count is declining. These would be strong enough to drive a strong spoos rally from here, earnings recession or no.
Fortunately calls are cheap enough to cover spoos shorts, and there's still enough skew to make them premium neutral.
Maybe last year's shakiness was caused by the earnings recession, and now that the historical data has peaked the movement is over.
Even if the above is wrong, all things equal equities should grind up - companies in major indices almost by definition will be making money every year, returning some to shareholders and using the rest to grow.
But maybe this is all just top of range talk.
Mirror image -duh, right. Completely agree
ReplyThis talk of spoos and gold etc. is all very charming, but let's get down to Macro - what time do we start crushing the GBP vol? I don't think it will carry on rising into the vote, there has to be a point out off all of these debates where someone of significance on the Brexit side screws up and alienates supporters.
ReplyIt's like a sudden death penalty shoot out.