While China's currency devaluation has, alongside the price of commodities, become one of the two key drivers of market volatility and tubulence around the globe, when it comes to risk, one far more important Chinese metric is the actual amount of capital that leaves the nation.

The reason for this is that as explained over the weekend, in a world where Quantitative Tightening by EMs and SWFs has emerged as a powerful counterforce to Quantitative Easing - or liquidity injections - by developed central banks, what matters for global risk levels is the net effect of these two opposing money flows.

Of all the global "quantitative tighteners", the biggest culprit is China, which has seen over $1 trillion in reserve selling since the summer of 2014, the direct result of a virtually identical amount in capital outflows.

Furthermore in for a "closed' Capital Account system like is China, the selling of FX reserves is a direct function of capital outflows, so the only real data needed to extrapolate not only the matched reserve selling and thus Quantitative Tightening, but also the direct impact onglobal risk assets, is how much capital outflow has taken place.

This takes place in one of two ways: by relying on official Chinese historical data, or by estimating how much outflows take place on a concurrent basis, thus allowing one to estimate how much capital is flowing out in real time. Indicatively, China's SAFE released onshore FX settlement data for the whole banking system (PBoC+banks), suggesting some $97bn of FX outflows in Dec, which is broadly in line with the fall in official reserves.

But much more important is the question what is taking place right now, the answer to which can either wait until SAFE releases January data in several weeks... or rely on day to day estimates of outflows in the form of central bank FX intervention. 

Luckily, we have just that.

According to a Goldman report, so far in January "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.

This would make January the month with the second largest amount of intervention since August 2015, and thus the second highest month of capital outflows, and would explain the ongoing deterioration across global asset classes as China's various FX reserve managers have been forced to sell not just government bonds but equities as well. 

Goldman also calculates that "total intervention over the last 6 months, using our estimates, sums to USD 775bn." Run-rating this amount would suggest that nearly $1.6 trillion in Quantiative Tightening is taking place just due to China's attempts to stem capital flight. This number excludes the hundreds of billions in reserves that all other petrodollar and EM nations have to liquidate as well to prevent the rapid devaluation of their own currencies as the world remains caught in the global dollar margin call we first explained in early 2015.

The implications from this are two-fold:

Of course, China's rabid defense of further capital outflows means that its original intent, to devalue the Yuan to a degree that boosts its economy via exports, has been put on hiatus, or in other words China is trapped, and instead of an external rebalancing it is forced to boost its economy in the one way it knows best: by issuing ever more debt. However, with China's total debt now estimated at 350% of GDP, it only has a finite amount of time before the debt bubble finally pops as well.

In other words, for China there is, as of this moment, quite literally no way out, and what's worse the longer it delay the decision of how it will reset its economy, the worse it will be for global risk markets.

Saudi Arabia - which was busy playing headline hockey with Russia this morning over a rumored 5% production cut proposal - is running out of money.

Yes, we know, that sounds absurd. But believe it or not, the country whose monarch recently rented the entire Four Seasons hotel for a 48 hour stay in Washington DC, is in fact going broke. And at a fairly rapid clip.

The problem: slumping crude. As we first discussed in November of 2014, Riyadh’s move to kill the fabled petrodollar in an effort to bankrupt the US shale complex was a risky proposition. If ZIRP kept US producers in the game longer than the Saudis anticipated, crashing crude could end up blowing a hole in the kingdom’s budget - especially if Iranian supply came back on line and added to the supply glut.

Fast forward a 14 months and that’s exactly what’s happened. US production is down but not wholly out (yet) and the Iranians are adding 500,000 barrels per day in output in Q1 and 100,000,000 per day by the end of the year.

Compounding the problem is the war in Yemen (which will enter its second year this March) and the cost of providing subsidies for everyday Saudis.

All of this has conspired to leave Riyadh with a budget deficit of 16%. That’s expected to narrow in 2016 but at 13%, will still be quite large. Make no mistake, if crude continues to sell for between $30 and $35 per barrel, 13% will probably prove to be a rather conservative estimate.

"This is a quantum leap in all aspects," Abdullatif al-Othman, governor of the Saudi Arabian General Investment Authority, told a conference convened this week to study ways for the kingdom to cut spending and shore up the budget. Here's Reuters:

Stakes in the operations of big state companies, including national oil giant Saudi Aramco, would be sold off; underused assets owned by the government, such as vast land holdings and mineral deposits, would be made available for development.

Parts of the government itself, including some areas of the national health care system, would be converted into independent commercial companies to improve efficiency and reduce the financial burden on the state. The number of privately run schools would rise to around 25 percent from 14 percent.

Meanwhile, the government would use its massive financial resources to help diversify the economy beyond oil into sectors such as shipbuilding, information technology and tourism, by awarding contracts to new firms and providing finance.

Fadl al-Boainain, a prominent Saudi private-sector economist who attended the conference, said he welcomed officials' emphasis on developing parts of the economy that had long been neglected because of the focus on oil.

But he added: "The overall economic situation does not support the great optimism that ministers expressed, and it does not support the indicators they referred to.

Meanwhile, the market is betting that the pressure will ultimately force the Saudis to abandon the riyal peg. Keeping the currency tethered to the dollar is yet another drag on the country’s finances and all in all, the kingdom saw its FX reserve war chest dwindle by more than $100 billion through November.

That’s what we mean when we say the monarchy is going broke.

In December, the bleeding continued unabated. Data out today from SAMA shows the Saudis blew through some $19.4 billion last month, as the war chest shrank to $608 billion. 

Thanks to the fact that the composition of the SAMA piggybank is a state secret, we don't know how much of the drawdown was USTs, but it's safe to say some US paper was sold.

As a reminder, the IMF estimates that if current market conditions persist, the kingdom will have burned through the entirety of their rainy day fund within just five years. 

Here's BofAML's analysis of the SAMA stash and how long Riyadh can hold out under various assumptions for crude prices and borrowing.

So even as the Saudis swear the headlines surrounding a proposed 5% production cut are bogus and even if Riyadh managed to weather the storm slightly better in 2015 than some predicted, the kingdom effectively has two choices: 1) cut production, or 2) drop the riyal peg. 

Otherwise, King Salman won't be able to tap SAMA for the money he needs to rent Mercedes S600 fleets - and we can't have that...

Submitted by Bryce Coward via Gavekal Capital blog,

Most stocks are down since the global equity markets peaked on 5/21/2015 (this goes without saying) and most stocks are down a lot. This puts a premium on solid active management and stock picking. But the sheer numbers are striking.

Of the 2885 companies in our GKCI All Country World Index, fully 2383 (or 83%) of them are down since the 5/21/2015 high, leaving only 502 (or 17%) of stocks up since that date. A stock-pickers market if we ever saw one! The first chart below illustrates this blunt point.

As we dig into the details, however, we see just how hard it’s been to stay above water since the May 21, 2015 peak in the global equity markets. Below we show a histogram of the distribution of stock returns since the 5/21 high. Mostly what you see is red (negative returns) and within that group you see an incredible amount of dark red between the bars that read -18% through -54%.

That is to say, most stocks that are down are down between 18-54%! In other words, there are landmines everywhere, and index tracking active mutual funds and ETFs have hit them all.

The onslaught from JPMorgan continues, which in the aftermath of first Marko Kolanovic's periodic threatsabout sudden market crashes, and Mislav Matejka's recurring warnings that BTFD is dead and "not to overstay your welcome in the bounce", earlier today JPM's chief equity strategist Dubravko Lakos-Bujas has officially cut his 2016 year-end S&P500 earnings forecast to $120 from $123 "on stronger US Dollar and lower economic growth forecast" as well as trimming his year end S&500 target from 2,200 to 2,000.

Here are the seven reasons why JPM continues to push the bear case:

The risk-reward for equities is deteriorating. There is increasing risk that elevated volatility starts incurring enough technical damage to market psychology and spills over, negatively impacting investor, consumer and business sentiment, resulting in a lack of risk taking, and eventually creating a negative feedback loop into the real economy. Going forward we see equity risk remaining asymmetric to the downside given:

1. rising risk of US earnings recession,
2. diverging central bank policies and a Fed that is trying to tighten causing USD to strengthen,
3. US manufacturing sector already in recession territory and non-manufacturing sector continuing to decelerate,
4. deteriorating macroeconomic backdrop with China posing a significant risk to global markets,
5. credit spreads widening and high yield approaching recession levels,
6. late cycle dynamics,
7. continued elevated volatility likely to impact sentiment—VIX has been averaging ~20 for the last 6 months.

As Dubravko summarizes, "this all makes for an unattractive equity backdrop." Furthermore, just like his peers, the third croat notes that there may be a short-term rebound, it is one that should be sold:

"While in the short term an expected pickup in buyback activity and positive 4Q earnings surprises may provide some support to equities, absent a positive central bank catalyst we see equity risks skewed to the downside over the medium term. We have been highlighting for some time that normalization of US monetary policy could pose a significant risk to equities. If equities get progressively worse with sentiment spilling over into the real economy, the Fed may be forced to pause for a while. This could be a relief to the USD and a positive for equity prices and earnings. However, if the Fed continues to normalize, there is a high degree of risk that equities begin to price in a policy error.Also, this is an election year in the US with partisan debate around a range of issues—tax reform (corporate, personal), fiscal policy (infrastructure, defense programs), healthcare. Depending on election outcome (i.e. far right vs. far left) the implication for US equities and sectors could vary by a wide degree.

All of this puts the Fed's credibility in the crosshairs: the market is already expecting just one rate hike in 2016 vs the Fed's "dot plot" forecast of 4. Just how will Yellen converge the two outlooks without leading to even more volatility?

And then there is the economy: "US economic growth estimate for 2016 GDP has been revised down to 1.8% compared to 2.3% in December, which is a step down from 2.4-2.5% seen over the last two years:"

Which brings us to the conclusion:

We are lowering 2016 S&P 500 EPS to $120 from $123 on stronger US Dollar and lower economic growth forecast. The negative  revision to our 2016 EPS estimate is due to the further rise in USD TWI (every 2% increase in USD results in negative earnings revisions of ~1%) and deceleration in US GDP forecast (to 1.8% from 2.3%). Our revised $120 EPS assumes flat sales growth (Street at 3%), flat margins (Street at +6bps) and buybacks contributing ~2% to EPS growth. Risk of earnings recession is rising, with S&P 500 likely to print 2 consecutive years (’15, ‘16e) of flat to negative earnings growth. Additionally, we expect volatility to remain elevated and continue to exert negative pressure on the P/E multiple.

Of course, using a well-known Keynesian strategy, if one only excludes all the negatives, only the great news is left, which may explain what the algos are doing today the stock market today. As for tomorrow, we hope Gartman decides to chase the rebound so the shorting can again resume.