Deutsche Bank

Logically, the massive liquidation of USD assets by China and other emerging market central banks should put upward pressure on UST yields and will, all else equal, work at cross purposes with DM central bank QE. But all else is never really equal...

"there is a sense that policy is being priced to “fail” rather than succeed... why should equities always rise in value? Why should debt holders be expected to afford their debt burden? There are plenty of alternative viable equilibria with SPX half its value, longevity liabilities in default and debt deflation in abundance. In those equilibria traditional QE ceases to work and the only road back to what we think is the current desired equilibrium is via true helicopter money via fiscal stimulus where there are no independent central banks.

Mario Draghi has no more magic bullets left...

"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. 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."

Thousands of investors with stop-loss orders on their ETFs saw those positions crushed in the first 30 minutes of trading last Monday, August 24th. Seeing a price blow right through your stop is perhaps the worst experience in all of investing because it seems like such a betrayal. “Hey, isn’t this what a smart investor is supposed to do? What do you mean there was no liquidity at my stop? What do you mean I got filled $5 below my stop? Wait… now the price is back above my stop! Is this for real?” Welcome to the Big Leagues of Investing Pain.

Perhaps one of the most notable features of the upcoming nonfarm payrolls report - which those with a flair for the dramatic have once again dubbed the "most important ever" simply because it may greenlight (or not) a Fed rate hike (any NFP print at 230K and above likely assures a September move by the Fed - which Wall Street consensus sees rising by 217K in August (although with Goldman a far below consensus 190K, and Wall Street's biggest cheerleader Joe LaVorgna predicting only 170K one has to wonder) is just how hard the punditry is trying to talk it down, with everyone from Joe LaVorgna to Bloomberg explaining why it is very likely that - due to seasonals only, and nothing but seasonals - it will be a weak report, only to be revised higher.

This Friday appears to be make or break for the Fed's data dependency, as the FOMC's September rate decision looms.

All eyes will be on Mario Draghi on Thursday as expectations for something big from the former Goldmanite have grown over the past two weeks. More specifically, some now think the odds of QE expansion have increased considerably in light of collapsing eurozone inflation expectations, the incipient threat of some $1 trillion in QE-offsetting EM FX reserve draw downs, turmoil in China's financial markets, heightened volatility across the globe, and chaos in emerging markets from LatAm to AsiaPac.

"China is imposing fresh controls to prevent too much money from leaving the country, in an effort to keep badly needed funds at home to battle a deepening slowdown in the world’s No. 2 economy." This is undsiputedly bad news for China, but Blythe Masters would be the first to admit, escalating Chinese capital controls would be just the thing bitcoin needs to surge, and surpass, it previous all time highs...

"One of the biggest problems we face is that there is no historical template for current global market conditions so we’re all flying blind to a large degree. Never before have so many of the most important countries in the world printed so much money and left base rates at near zero for so long. Also never before has the largest economy in the world tried to start a slow process of reversing said extraordinary policy. So there is no road map for this journey, only educated (hopefully) predictions."

As Deutsche Bank put it on Tuesday, we've officially reached the end of the "Great Accumulation" as slumping Chinese growth, plunging crude, and an imminent Fed hike have put enormous pressure on emerging economies’ accumulated stash of FX reserves and that means that buyers of USD assets are becoming sellers at the expense of global liquidity and the perpetual bid for some core paper. Now, Goldman has weighed in, noting that the rise in foreign FX reserves held by non-G-7 countries that started around 2003-04 (at around US$1trn) appears to have ended for good.

"Worryingly, EM capital flows are already significantly undershooting the projection from the hawkish scenario. The less constructive view is that the Fed balance sheet simply matters far more for EM, with liquidity provided by the ECB and BoJ a poor compensation for the Fed’s retrenchment. The hawkish scenario of Fed stopping reinvestment next year would suggest that EM flows can get weaker, while even a more dovish scenario of a constant Fed balance sheet would not be enough to lift inflows again."

"The current secular shift in reserve manager behavior represents the equivalent to Quantitative Tightening, or QT. This force is likely to be a persistent headwind towards developed market central banks’ exit from unconventional policy in coming years, representing an additional source of uncertainty in the global economy. The path to “normalization” will likely remain slow and fraught with difficulty."

Last week, the world was introduced to what Deutsche Bank has branded "quantitative tightening" or, in layman’s terms, "reverse QE." We - as well as Citi and SocGen - have endeavored to speculate on what hundreds of billions (if not trillions) in EM FX reserve liquidation may mean for UST yields, but if you’re looking for other ways to trade QT, Deutsche Bank has an idea.