It seemed like it was the Credit and Bond markets (the better informed markets) that saw this action first and equity markets (what most professional traders would consider to be the least informed market) definitely saw it last.
One of the last updates of the day started like this,
"The Impression I get is that something is being discounted rapidly, something the market is not going to like. Protection is being sough, risk is being sold."
Markets that were effected or at least that we were tracking were VIX futures, Credit, the currency markets and especially carry trades with the EUR/JPY in particular, Yields, other leading indicators and then the equity averages and major Industry groups like Tech and Financials.
You might recall that I checked in with an old trading buddy when I did nothing but trade full-time, he also works for a large investment bank which means I can't say much more about it as they really have strict rules about working for them and placing any personal trades. I asked, "Did you notice anything strange about the market (Friday)?" His answer was words to the effect that If his shorts were not dragging his portfolio in to the red, he'd say we had hit a top Friday. This is not what I wanted to hear or maybe it was, he is a brilliant trader, but uses a completely different system so he doesn't have access to 3C. For me the point was, if this guy didn't notice it, then I doubt more than half of 1% of all retail traders noticed it, but it was a big deal.
The bottom line, something seemed to have leaked out in what I called a Wall Street whisper (based on the earnings "Whisper Number" which is Wall St/'s view, not consensus). Further more it seemed like it was something Wall Street was not going to like and protection was being sought.
Just over the weekend tensions between Japan and China have heated up again over Japan's PM, Abe okaying a plan to shoot down foreign drones over Japanese territory if they refuse to leave after a warning, this after a Chinese drone recently flew along Japan's airspace. The dispute over the Senkaku/Diaoyu Islands between the two countries since Japan purchased them in 2012 has almost always heated up as a proxy over economic activity, namely Japanese hot money flows causing inflation in China as a result of the gargantuan Japanese version of QE which aimed to double their monetary base within two years. All of these newly created yen are looking for a higher yielding home and most often they have found it in China's real estate market, when this happens, China typically rattles the sabers over the island chain, it's almost as reliable as a clock.
Other "Hot money flows" in to China's real estate market come courtesy of the F_E_D's QE of $85 billion $USD a month. In fact for the month of September, China bought $126 billion Yuan in $USD's to try to sop up some of the excess money floating in their economy.
China's Housing Market is heating or overheating again due largely to hot money flows, the last two days have seen two different reports, 1 report shows that 69 of 70 Chinese cities posted y/o/y price gains and a second report shows Shanghai real estate gained +12% in a SINGLE WEEK!
Last night the Chinese Shanghai Composite closed down -1.25% and the Nikkei closed down 2%, I believe the reason why has its roots in what we saw Friday October 18th.
Overnight Bloomberg released this report...
"China’s biggest banks tripled the amount of bad loans written off in the first half, cleaning up their books ahead of what may be a fresh wave of defaults."
Essentially the biggest banks and one of the most profitable in the world have upped the pace of writing off non-performming loans as fears mount that a fresh wave of defaults is ready to hit the banks.
However what we may have seen Friday, while connected to the above issue is something a bit more unique. Remember Dan Loeb's Third Point just coming out and saying they'd return 10% of client's capital and they've dramatically lowered their exposure to equities amid growing concerns over the "Global" economy". I have a feeling "Global" might indeed specifically mean China who has already been seeing a huge drop in growth which we first identified in 2011 as commodity prices went south, only a few months later and we saw the first contractionary Chinese manufacturing PMIs.
As to what we witnessed Friday...
China's PBoC (People's Bank of China, their Central Bank" injects capital in to the system through open market operations / Reverse Repos by partially off-stting maturing bills.
These operations are held Tuesday and Thursday of each week. The PBoC injected $10 billion Yuan of 7-day reverse repo contracts on Tuesday October 15th and then on Thursday October 17th, the PBoC withheld their 14-day reverse repo on Thursday October 17th (for the first time since last July), this in effect DRAINED $44.5 Billion Yuan from the market last week according to Reuter's calculations.
The $126 Billion yuan purchase of $USD's in September was an increase of $99 billion over August.
China's debt is now at record levels, but the problem is it needs to create more credit growth to generate the same amount or even smaller amounts of GDP growth...
"The nation’s debt-to-GDP ratio, excluding central government and financial debt, widened to 207 percent as credit growth continued to outpace productivity gains, Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong, wrote in an Oct. 21 note to clients. That’s making investors nervous about bad loans rising at banks, he said."
Then comes last night's Bloomberg story of the largest Chinese banks writing off non-performing loans at three times the normal pace, they are seemingly bracing for a massive default on numerous loans as the real estate market once again is way over heated, +12% gain in Shanghai property is a single week!
Overnight funding rates went through the roof last night with 1-day repos up 67 basis points to 3.7561% and the 7-day repo up 42 basis points to 4.0000%.
Essentially what the market realized Thursday (when the 14-day repos were withheld) and appeared to act on Friday was the fact that between sopping up $USDs and withholding massive injections of liquidity, China is suddenly engaging in a tightening policy which essentially is offsetting the US's QE policy. Furthermore there's a credit bubble implosion about to happen as the largest banks are already bracing and to mitigate some of these effects, China is turning to policies that will kill growth as well, Dan Loeb was right on time with his observations.
I have almost no doubt whatsoever that this is indeed what the market (first the smarter money in credit and bonds and lastly equities) was reacting to on Friday, Chinese tightening, a Credit bubble built around housing prices (circa US 2007-2008) and policies that will kill Chinese growth.
If you're not worried about the situation or perhaps don't understand it, all you have to do is look at what we discovered Friday, check the posts from Friday again to see how dramatic the shift was.
No comments:
Post a Comment