Beijing surprised China-watchers this morning, when the PBOC announced that in January, China’s foreign-currency reserves dipped by $12.3 billion, below the key "psychological level" of $3 trillion, or $2.998 trillion to be exact, declining for the 7th consecutive month, and dropping to the lowest since early 2011.
The dollar rebounded from a key support level, strengthening against all major peers, pushing S&P futures higher as European shares rose, led by basic resources and real estate, while Asian stocks fall. Gold fell from its highest level since November as demand for some haven assets ebbed while global bonds declined. Oil dipped, pressured by a stronger dollar.
The central bank on Friday increased the interest rates on reverse repo by 10bp - the last time the PBOC raised OMO rates was more than two years ago in 2014. The PBOC also increased SLF rates, in what some have dubbed "the Most Important Unnoticed Global Event."
European stocks and S&P futures rose modestly ahead of January US payrolls data, along with the dollar, while Asian shares dropped after China returned from a week-long holiday. Bonds slid, oil rose while the JGB intervened in the bond market to prevent a bond rout, in one of two major surprises during the Asian session.
With the Yuan suffering its largest annual decline ever and avenues for capital flight surging in value (Vancouver homes and virtual currencies), it is perhaps not entirely shocking that, according to the Institute of International Finance, capital outflows from China surged last year to a record $725 billion. Furthermore, IIF warns, outflows could accelerate further if U.S. firms face political pressure to repatriate profits.
"We have argued the current monetary regime is in its evanescence, and that the Fed is trying to raise rates to attract global wealth to dollars and dollar-denominated assets as global leverage, demand and output growth declines. If we are right, then we should not expect other economies to sit by idly... which keep us cautious on equities, bullish on Treasuries and gold, and negative on credit:"
This “powder keg” may not wait until then. For “then” (March) may be a moment too late. (Just ask Caesar).Circumstances are now showing this “powder keg” could in fact become – self-combusting. All courtesy of The Fed’s own words whether, stated, implied, written, or imagined.
US equity futures are unchanged, trading near record highs after digesting a spate of earnings results on Thursday. The dollar pared its weekly loss as the yen and pound slid, while gold headed for its longest slump in three months. European equities fell and markets in Asia were mixed at the start of Lunar New Year holidays.
China's surprise increase in interest rates on medium-term loans weighed on bond prices on Wednesday, hammering bond prices, sending benchmark 10-year treasury futures sharply lower and pushing 10 Year yields up by 6 bps, making the January move higher in yields the biggest jump since October 2010.