As it stands now what is really happening with the biggest risk factor to commodity, credit and capital markets, remains a mystery, and instead of getting some much needed clarity from China’s January reserve number, the world’s traders and investors will now have to wait for the February reserve update one month from now to learn if China has managed to slay its capital outflow demons, or if these were just getting started.
And even as China added $3.4 billion to its gold reserves, which rose to $63.6 billion or an increase of half a million ounces to 56.66 million, this reduced the total amount of Chinese foreign reserves to the lowest level since May 2012, and down from the $4 trillion peak in the summer of 2014 when the US Dollar started its rapid appreciation on rate hike concerns, and led to nearly a trillion dollars in Chinese capital outflows.
That, however, is a bridge we will cross some time in the summer of 2016.
For now the real question is what does the JanuaryChinese FX outflow mean for risk come Monday’s open, and how will it affect markets when they start opening tonight, if not in China which is closed for the week for its new year celebrations.
Recall that in our Thursday preview we warned that according to one of the more prominent bears from BofA, Michael Hartnett, had the reserve outflow come in well below expected, it would unleash a “vicious bear market rally.”
This is what we said:
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.That said, keep in mind that BofA itself had a far more optimistic forecast than consensus:
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.
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