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For "Fearful, Erratic Markets", China's Reserves Are The New Risk-On/Off Trigger: Goldman
Don’t look now, but China’s FX reserves may become the market’s most important risk-on/ risk-off trigger.
Just as the world finally woke up - with the standard two or three year lag - to what we’ve been saying about an acute lack of liquidity in bond markets on the way to making corporate bond market liquidity the talk of the financial universe, so too has everyone suddenly realized why we began shouting about the death of the petrodollar last November. The drawdown of EM FX reserves - or, as Deutsche Bank calls it, the end of the “Great Accumulation” - means a withdrawal of liquidity from global markets and the cessation of the perpetual bid for US paper that had been sustained for years by the buildup of emerging markets’ war chests.
Now, between falling commodity prices and the global currency wars, the assets in those war chests are being sold, and that means the Fed faces a very, very difficult decision on whether to hike.
It also means that market participants will be watching EM FX reserves more closely than they have at any other time since the Asian Financial Crisis, and that, in turn means that data on reserves, and especially on China’s reserves, is set to become very important as a catalyst for risk-on/ risk-off behavior. On that note, we bring you the following commentary from Goldman out this morning.
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From Goldman
Following the RMB devaluation some weeks ago, markets have been erratic, fearful that the initial move was the beginning of a larger devaluation cycle that could disrupt global markets. We don’t believe this, in part because we think the RMB is close to our estimate of 'fair value', as we showed in a recent FX Views, so that the rationale for a bigger weakening does not look strong to us. That said, markets remain sceptical and are looking to August FX reserves, which will be published overnight (New York time) Sunday to Monday. Consensus (according to data collated by Bloomberg) expects total foreign exchange reserves to fall to $3,580bn from $3,651bn in July, a drop of -$71bn. We estimate valuation effects for the month around $21bn, driven mostly by the rise in EUR/$, which means that the underlying “flow” change in reserves would be -$92bn. Combining this with consensus for the August trade surplus ($49bn) and assuming that the current account surplus is lower due to service outflows, the underlying net capital outflows could be north of $100bn, which seems to us to be a reasonable approximation of market expectations. We think risks are skewed to the upside relative to this consensus estimate.
Given how worried markets have been about China, a better-than-expected reserves number holds the potential for risk assets to rally as devaluation fears abate. That said, the next data point on FX reserves will not be the definitive word on flows, since PBoC FX reserves in recent quarters have not been a good predictor of “true” flows as measured by the Balance of Payments (BoP). In particular, the mapping from PBoC reserves to BoP flows went off track from Q4 last year, with PBoC reserves first over-predicting reserve accumulation in Q4 and Q1, by $50bn and $100bn respectively, and then under-predicting in Q2 (by $100bn). In other words, some caution will still be advised in drawing conclusions on flows, where we see the BoP data as the ultimate arbiter. Our EM strategy team has discussed the broader EM context here.
An additional perspective can be gleaned by looking at official foreign exchange reserves in the rest of non-Japan Asia (NJA), where we also include information on forward books when that is available (Hong Kong, Philippines, Indonesia, Thailand, Malaysia, Korea, India and Singapore). Data for most countries are available through July, but the Bank of Thailand publishes weekly data for the bulk of August. We estimate FX-valuation-adjusted declines in reserves (including forward books) at -$9.2bn for Malaysia in July alone, at -$5.8bn for Thailand in July and August, at -$3.6bn for Indonesia and -$2.9bn for Hong Kong. These declines in official FX reserves are sizeable, and the example of THB suggests that depreciation pressures more generally may have risen materially. The look across the region therefore bolsters our view of potentially bigger outflows from China than is implied by consensus.
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These declines in official FX reserves are sizeable, and the example of THB suggests that depreciation pressures more generally may have risen materially. The look across the region therefore bolsters our view of potentially bigger outflows from China than is implied by consensus.
Fortunately (or not) all Goldman anal-cysts have fled Chinas latest Great Leap Forward led by Meng...lol.
Hey Goldman Sux: ESAD!
If it will help levitate the Chinese stock market, then a better-than-expected reserve number is exactly what we shall have. However, that number will be conjured up by the same people who report Chinese gold purchases.
I disagree. The Chinese plan is to destabilize the Western financial system so a worse than expected number is what you'll see. The Chinese know when everything crumbles and the dust starts to settle they will be sitting on top of the heap. Hopefully the heap isn't too radioactive.
My opinion for what it's worth.
Let's see if I have this straight...
The whole financial world is waiting with bated breath for China to make a factual report of its FX reserves even if such a report harms their own internal political fortunes?
Getting an honest number out of China is about as possible as getting an opportunity to count gold bars in the basement of Fort Knox.
I bet the Fed through the primary dealer cocksuckers, will buy Quatar or SA issue bonds and tell them to keep buyin treasuries. Stealth QE 4
August 22, 2015
Credit Bubble Bulletin
Weekly Commentary: It’s Always Worse Than You Think
http://creditbubblebulletin.blogspot.com/2015/08/weekly-commentary-its-a...
Excerpt:
As an analyst of Credit and (serial) Bubbles going back 25 years, there’s a recurring theme that is especially pertinent these days. Financial and economic Bubbles invariably prove much more resilient than Bubble analysts presume. And, at the end of the day, the excesses and consequences go beyond what even the hardcore “bears” could anticipate. The adage around our office became: “It’s Always Worse Than You Think.”
I expected a reversal of “hot money” flows and leverage that flowed freely into Mexico in the early-nineties to end in financial turmoil. The Mexican collapse unearthed excesses even worse than assumed. I fully expected the Asian Tiger Bubbles to implode. That fiasco proved much worse than anticipated. I saw the 1998 crisis coming. I knew major speculative excess had set the stage for financial dislocation. Yet I was shocked to learn of the egregious leverage employed by what was at the time one of the world’s most respected hedge fund complexes (LTCM). I knew Argentina was in trouble in 2000, but things were much more fragile than anticipated. I was confident that the mortgage finance Bubble would burst with devastating consequences. But, once again, boom-time excesses and shenanigans proved beyond even my hardcore (“wacko”) bearish expectations.
I really fear for the unwind of the “global government finance Bubble” - the grand finale of a multi-decade period of serial Bubbles. It’s history’s first systemic global Bubble, encompassing the world’s Credit systems, securities markets and monetary systems more generally. Excesses have engulfed the heart of “money” and Credit throughout both the “developing” and “developed” world. Central banks (of all stripes) have printed Trillions of “money” and Trillions more have been created in the process of leveraging securities and other assets. This type of monetary inflation invariably incentivizes destabilizing speculation, fraud, malfeasance and wealth redistribution. It’s fomented a geopolitical tinderbox.
.. and across the ocean a butterfly flaps its wings ...
Clearly China should so kind as to let the guys at Goldman know in advance how much they're going to dump monthly and quarterly so it can be front run.
They put those orders through Goldman et al.
Don't worry about the squid, the built the game that all the alumni who run the worlds CB's play.
They have trillions of worthless fiat debt notes. Good for them!
HA!
:)
Earlier in the year I went to ‘safe’ investments in a Fidelity account.
Today I received a letter from Fidelity.
Across the top of the letter -
“Your account may need attention. Call today.”
The letter goes on to explain they’ve reviewed my account and are advising my investment choices are inappropriate. I need more stocks!
I will buy their long-term treasuries, if they are that stupid to sell 30yr bonds that yield 3% when their economy is probably at negative growth and all other developed market bonds yield 2%. That's a 30% gain, exactly what Cali teachers pension is thinking when increasing their portfolio in LT treasuries by billions.
Hey, this is coming from Goldman and Deutsche - how are their interest rate swaps looking? Going belly flop if the NY FED allows yields to go where they should go.
Or you think it makes sense that our long term yield is almost 50 bps rich to freaking UK - the other whores of finance/rigging.
Fuck Goldman Sachs!
How long will the Chinese spent international reserves to allow “money” to exit China at high dollar fx ?