A Preview Of This Weekend's Event That Could Unleash A "Vicious Bear Market Rally"

Tyler Durden's picture

As noted earlier today, BofA's chief credit strategist Michael Hartnett is anything but bullish: in his own words, he remains a seller "into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (e.g. Shanghai Accord) begins to reverse the deterioration in global profit expectations and credit conditions."

There is, however, one major catalyst that will take place over the weekend that could change Hartnett's mind if only for the near term: one that could unleash a "vicious bear market rally" in his words.

As Hartnett writes, "US dollar unwind may ultimately be seen as an important inflection point for US monetary conditions…signal that “automatic stabilizers” finally coming into play; means relief for “humiliated” assets in EM, commodities, resources; markets begin to discount policy response; if China FX reserves data is better than expected, we think a bear market rally is likely to be vicious."

As a reminder, here is why the world is so focused on China's FX reserves, which have seen over $1 trillion in capital outflows since the summer of 2014 when China's reserve liquidation problem began in earnest.


As a further reminder, it is the pace of Chinese capital outflows, the largest among the entire EM space, that has become the "Quantitative Tightening" counterpoint to the liquidity injections by such DM central banks as the ECB and the BOJ, and which according to many is the primary reason for the recent acute weakness across asset classes as Citi recently explained.


So what is the reported number due this coming Sunday, that could unleash a vicious rally?

It's here that things get tricky.

According to consensus estimates, China will report that its total FX reserves declined to $3.2125 trillion from $3.33 trillion: a drop of $118 billion, or modestly higher than the massive December $108 billion outflow.

In other words, a reported number below, and certainly substantially below, $118 billion for the January outflow and it would be off to the races as a massive short squeeze will grip all the commodity and materials-linked sectors.

To be sure, BofA FX strategist Claudio Piron expects a far smaller print:

We forecast China FX reserve changes and estimate a USD37.5bn fall in January – (USD29.1bn decline adjusting for a negative FX valuation effect). Note that the standard error of the forecast is large at USD24.5bn, which would give us a downside of USD84.5bn fall. We caution that this is guidance and we attempt to be as transparent as possible so investors can gauge the odds in what is a key release for the markets. Note too this is based on onshore CNY FX volumes and our estimate maybe biased down as there are no real time volumes for offshore CNH.


So yes: if the number is a paltry $37.5 billion, it would mean that suddenly China's outflows are "contained", if only for the time being, and that the PBOC may have managed to quell the relentless exodus of domestic hot money abroad (whether it's real or not is a different story).

However, just as a far smaller than expected number will be very bullish, so a far greater number will be very bearish. Which brings us to a post we wrote last week showing what may have been the main reason for the dramatic January market selloff. According to estimates by Goldman Sachs, not only have outflows not slowed down as dramatically as BofA believes, but they have in fact soared to an all time high $185 billion.

This is what Goldman said:

There has been around $USD 185bn of intervention (with the recent intervention predominantly taking place in the onshore market)" split roughly $143 billion on the domestic side and $42 billion on the offshore Yuan side.


Since then it only got worse: courtesy of Fasanara Capital we know that in the last few days, GS revised up the magnitude of the Chinese FX spot intervention to $197bn in January 2016, when adding a $12 billion valuation adjustment, lowering the total FX reserves to just $3.133 trillion!

As Fasanara accurately adds, "in case reserves drop more than consensus (as GS estimates) we could see further pressure on USDCNH and other Asian currencies, together with continued negative reaction by global markets."

In other words, Fasanara lays out the opposite scenario to that of Harnett: one where if outflows surprise to the upside, what will follow is a vicious selloff.

* * *

So there is your bogey, one which will set the mood for risk over the next month: this weekend, China will announce its January reserve outflows which are expected to decline by about $120 billion. Should the number be far less (ostensibly closer to BofA' estimate of $37.5 billion) expect a whopper of a bear market rally coupled with a huge short squeeze. If Goldman is right, however, with its record ~$200 billion in FX intervention and implied outflows, then all bets are off.

Luckily for China, its market will be closed next week due to Chinese New Year Holiday. Which means that it will be up to US and other global stock markets to cushion the surprise until China's FX trading comes back online, and the result in this already illiquid market, could make or break many asset managers year in the span of a day.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
db51's picture

A Vicious Bear?  WTF...What IS a Bear Market...I don't know if I've ever seen one?

Durrmockracy's picture
Durrmockracy (not verified) db51 Feb 4, 2016 2:44 PM

they're omnivores... they'll eat anything...

order66's picture

In order to buy into that you first have to actually believe the China FX reserves data.

Hero Protagonist's picture

In order to believe that you have to actually believe there's a market.

mtl4's picture

I'd go with the anti-GS bet, much higher probability of being a profitable trade.

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) mtl4 Feb 4, 2016 3:49 PM

"hey're omnivores... they'll eat anything..."


So basically, they're Monsanto's BFF?

RAT005's picture

Chinese New Year starts this weekend so that should add more vacant uncertainty. 

SuperRay's picture

So I should buy the SPY and SDS? Fuck yeah, China!

turtle's picture

Hmmm.. I wonder what china will "say"....

Slomotrainwreck's picture

In order to beloieve that, you have to actually believe that unicorns can fly

Tyler Durden's picture

Absolutely not: nobody believes Chinese data. However, the number - as fabricated as it is - will set off a stampede by algos, whether up or down, and traders have no choice but to follow.

All a number is by itself, relative to just as meaningless expectations, is a buy or a sell signal.

nuubee's picture

Speaking as a programmer, I don't think the algo programmers have good subroutines for cynicism.

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) nuubee Feb 4, 2016 3:49 PM

Doze ALGO's have balls of steel! ~ lol

Soul Glow's picture

[T]raders have no choice but to follow.

Just looked at my silver coins.  They ain't following shit.

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) Soul Glow Feb 4, 2016 3:53 PM

I'm rethinking silver...


Yesterday, I was driving in a rainstorm & a fogbank (both together), otherwise, with snow on the landscape... So, I can hardly see anything even with my wipers going full blast...


I come up on a SILVER Chrysler 300 (that the dipshit doesn't even have his lights on, not that they would have done much good anyway)...


SERIOUSLY? a silver car?... I was about 2 inches from plowing my 1991 Ford F-150 into his shiny invisible ass...

jaxville's picture

The world is full of retards.  The real pisser is you would have been charged for rear ending the moron.

BlueStreet's picture

If, as you say, it could go up or down then the headline should reflect that view, no?

new game's picture

since following the logic of false data, then therefore it is chinese marbles for moar marbles til the next set of important false data. wow, cueing the realtor cheif economist for an opinion, oh that's right, now is a great tyme to buy at the top, ha, thanks for the insight! non/s

Strelnikov's picture

And threre are no longer such things as "traders".

Kayman's picture

Honest Chinese data is like HiLiary telling the truth- not gonna happen.

It's a compulsion, they lie even when the truth would be better.

Father Thyme's picture
Father Thyme (not verified) db51 Feb 4, 2016 2:58 PM

I saw a bear get its ass kicked by a Canadian fisherman once.

John West Salmon "Bear Fight" ad www.youtube.com/watch?v=CVS1UfCfxlU

BandGap's picture

A neighbor had three bears (mom and two full grown cubs) break into their garage when I was a lad. The fucking bears drank the deck paint (red, oil based) and generally trashed things.

The DNR told the guys in the neighborhood to blast them into the next dimension, and we did.

Mr.Danglemeat's picture

I know a guy in Helena Montana who was out in the mountains cutting firewood, when he shut his chainsaw off he heard his prized Black Labrador screaming and fighting with something.

 The guy took off running towards the fight and saw a Black Bear swatting the dog around, both dog and bear were bloodied pretty well. So, the guy grabs a busted tree branch and proceeds to beat that bear to death...he gets a fine from DNR 'cause you can't kill 'em with a club, only a gun or bow. It's called "illegal taking". Dog got patched up and turned out fine. Crazy World?

HockeyFool's picture

He should have claimed the bear attacked him first and the dog intervened, instead of the other way around. He would not have been fined.

Knob Creek's picture

Why did he use a tree branch?  He had a fucking chainsaw

SoDamnMad's picture

Hey Knob Creek

I wanna bring my Stihl on one of those Cologne trains and have at some of those fanny grabbers. What da ya think?

Mr.Danglemeat's picture

So you think he's supposed to go back and get the saw and then rescue his dog? Have you ever tried running with a chainsaw?...it's awkward. Besides, once in the fray, one small error and it's your own leg getting cut off....easy enough to do, even when you're not fighting a bear.

iggenFlot's picture
iggenFlot (not verified) db51 Feb 4, 2016 9:19 PM

It's only vicious if you're short.

Mark Mywords's picture
Mark Mywords (not verified) Feb 4, 2016 2:44 PM

Pull. THIS. Finger.

Infield_Fly's picture
Infield_Fly (not verified) Feb 4, 2016 2:44 PM

Bear market rally started in March 2009.

xrxs's picture

Couldn't they just cook up some numbers to roast Soros and co?

hungrydweller's picture

That's a damned good point.  They may do exactly that given the recent rhetoric.

commishbob's picture

Vicious Rally > Malicious Sellers??

jtmo3's picture

That's insider secret code for be ready to buy because we're going to ramp again.

BlueStreet's picture

BofA is watching too much CNBC and buying into the idea that China is the ONLY reason for the selloff rather than only ONE reason. Didn't BofA almost go belly-up a few years back. 

Truth Eater's picture

Sorry, but WTF is this article about?  Is this a story about China's report on fake money amounts?


First, it is fake fuckin money that can be printed till they run out of paper.  Secondly, when is the last time you could trust anything the Chinese said?  Third, how does this really matter?

hungrydweller's picture

It matters a whole bunch!  If I can increase the amount of green paper I can then exchange for yellow metal, I'm all for it.  I might have to buy a bigger boat though.

MSimon's picture

Small boats sink easier.

secretargentman's picture

That may be so, but big boats sink more catastrophically.

indygo55's picture

I think the story and Tylers comment instructs that if you are a trader you can jump on the bandwagon and ride this puppy either way its going then get out because the algos will go with the headlines not fundamentals. Isnt that what every trader does?

Wile's picture

More BS to allow those with inside info to make a scalp.

sgorem's picture

looks like right now would be a great time to add to my modest stash of the Precious...........no matter which way it goes over the weekend.

ebworthen's picture

Bear market rally, I get it, play on words - a vicious crash.  Let's hope so!

Will that Bear tear out the throat of Hank Paulson, Jon Corzine, and Lloyd Blankfein?

Mark Mywords's picture
Mark Mywords (not verified) ebworthen Feb 4, 2016 3:10 PM

Free Jon Corzine!

lordbyroniv's picture

uh no,...


A period in which prices of stocks increase during a bear market. A bear market rally is usually a short-lived market increase following a period of market decline.

new game's picture

does anyone here think maybe merica /euroland isn't buying near the shiploads of china crap?

not to mention the off the charts of malinvestment of production...

chinas problems go beyond anyones imagination as to the magnatude of their problems.

this is all just forplay til the minsky moment...

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Feb 4, 2016 3:09 PM

Who is going to remember on Monday what the Chinese released when the Super Bowl is Sunday?  Heck even the Chinese might be too busy preparing and watching the Super Bowl to remember to click send on the email for the report.  Didn't you hear Beyonce is doing the Half-Time show?  We need to put these things in perspective...

Kirk2NCC1701's picture

We at ZH can no longer afford to beliece ANY data that comes out of official gov channels, when it comes to the FX of major players like China.  Who cares about their porn charts?  I know I don't.


pakled's picture

Thanx for this report. Sort of been expecting a huge-o rally.. this couild be the trigger.


100 quatloos on Claudio Piron