China’s Forex Reserves Drop for First Quarter Since 1998
I and others have been talking about the European (more specifically the Euro-zone) banks selling everything not nailed down to raise their capital levels. This has been very obvious since at least October when we saw for the first time ever Markit's PrimeX 4 major averages (these are prime mortgages, not subprime and consider to be of some quality) all trade below par. The take away? EU banks were selling everything and that included $US dollar denominated assets which they then sold (the $US dollars) and bought Euros so they could repatriate the capital. In October this caused an algo legacy arbitrage rally as the Euro gained because of demand and the dollar fell because of supply, which sent the market up as the algos misinterpreted what was happening as bullish, as the $US was down, stocks looked cheap and the computers were buying.
We then saw other markets hit, specifically the F_E_D's custody account saw US Treasuries being sold en masse. The latest disclosure from the F_E_D this week shows a new all time record outflow of treasuries, $85 billion and counting as this is now 6 consecutive weeks of sales.
I have speculated that this has not only been in assets that are easy to track such as the F_E_D's foreign custody account, but probably US equities as well including hedge fund redemptions.
Where is the money going? Just look at the ECB deposit facility which has seen all time new highs this week in deposits that yield .75%. At this point, since the December 23rd ECB Long Term Repo Operation in which they offered 1% 3 year loans, there have been more deposits in to the ECB's deposit facility then capital taken by banks at the LTRO, meaning all of the LTRO cash and then some has been placed in the custody account for a loss of .25%.
In other words, the only lending going on between banks is facilitated by the ECB as no one trusts the counter-party banks. This is the same liquidity freeze seen during the 2008 sub-prime mortgage crisis. At this point, the only thing I can see that would get money out of the ECB and back in to the financial system would be the ECB cutting the deposit interest rate from the current .75%, but as Draghi stated this week, there has been no discussion of lowering the deposit interest.
My gut feeling is that the sovereigns, such as France/Sarkozy in particular who predicted the LTRO cash would be used in a carry trade in which the LTRO money is used to buy high yielding sovereign debt , is the goal of the sovereigns. As a banker, I think the ECB's Draghi understands that the banks primary goal is to raise cash and my gut feeling is that he agrees with that position and will likely not do anything to stop the current trend because when the financial system implodes (Greece's breakdown in talks re: debt restructuring could easily be the catalyst as they have a massive turnover of debt in March and may not get the next tranche of aid from the Troika in time, producing a disorderly default) the banks will be best served holding cash, not toxic bonds.
What all of this means for the US and debt issuance in the near future is another story and one that could be the least under appreciated ticking time bomb in the US markets.
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