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Here We Go Again: US Equities Surge Even As Chinese Stock Market Rollercoaster Tumbles To 8 Month Low

It seemed like finally China's relentless and increasingly futile attempts to have a green stock close would work: interest rate cuts, liquidity injections, direct stock interventions, even threats on the Prime Minister's head, and just to make certain moments before the close news very deliberately broke that government funds are buying large financial stocks, especially state-owned banks, to support the index, in the latest clear signs of government support, the Shanghai Composite seemed on pace to end an unprecedented series of consecutive tumbles which have dragged the composite down nearly 1000 points, or 25% in one week, and then... red close, with the SHCOMP down 1.3% to 2927, and a stunned China waching in horror as everything it throws at the biggest market bubble of 2015 does absolutely nothing.

Well, not nothing: what was a 60% stock market gain for the year on June 12 has turned into a -8% rout two months later.

Here are the cliff notes: the Shanghai Composite today has been up 1%, down 3.5%, up 4%, down 1.5% and closed down 1.3%. As Bloomberg's Richard Breslow noted, the composite is the poster child for and magnified image of how all sorts of assets have moved.

"The PBOC has serially announced aggressive and long-lasting market support measures, a cessation of support measures pending further study, a devaluation with murky explanation, a belated rate cut, followed up with ’’the recent interest rate and reserve requirement ratio cuts don’t represent a shift in China’s prudent monetary policy.’’ It isn’t just about a bubble being burst."

Actually it is: this is precisely what an asset bubble, which grew with everyone's blessing looks like, when all control is lost. For now, however it is all in the BOJ's hands, whose support of the USDJPY is all that is keeping the world from falling apart.

Here is a snapshot of tthe biggest selected cross-asset moves overnight:

  • Equities: Nikkei 225 (+3.2%), Stoxx 600 (-1.7%)
  • Bonds: German 10Yr yield (-8.4%), French 10Yr yield (-5.7%)
  • Commodities: LME 3m Copper (-2.4%), LME 3m Nickel (-1.9%)
  • FX: Euro (-0.5%), Yen spot (-0.5%)
  • U.S. mortgage applications, durable goods data due later
  • FTSE 100 down -1.5%, CAC 40 down -1.6%, DAX down -1.5%, IBEX 35 down -1.6%, FTSE MIB down -1.6%, S&P 500 futures up 1.3%, Euro Stoxx 50 down -1.7%

Elsewhere in Asia stock markets saw volatile trade as the region digested the PBoC rate cuts, however, aside from China, stock were seen higher across the board. This comes despite some analysts suggesting the cuts could be too little too late , reports that China raised fees and margin requirements for stock index futures trading and the S&P 500 closing lower by 1.35%. Nikkei 225 (+3.2%) led the region higher. 10yr JGBs (+4 ticks) and T notes (+15 ticks) were supported amid volatility in Asian stock markets.

Price volatility across various asset classes failed to be contained by yesterday's actions by the PBOC, which in turn resulted in European stocks opening lower across the board (Euro Stoxx: -1.4%), while Bunds subsequently gained on safe-haven related flows and moved above the key 100DMA line at 154.02 , with City suggesting buying Bunds as sell off is not part of a bigger correction. As a result of the safe-haven related flows, peripheral bond yield spreads widened, albeit marginally, as any upside there was likely contained by the growing likelihood of dovish ECB and bond buying.

Despite coming off the lowest levels of the session, stocks remained pressured by the ongoing underperformance in energy and materials sectors, with copper and other base metals trading lower overnight, as it remains to be seen whether the actions by the PBOC will spur an economic rebound. At the same time, EM sensitive stocks were particularly sensitive to the sell-off, with the likes of SABMiller down 3%, Standard Chartered down 2% and Antofagasta down nearly 3%.

US equity futures have continued their ridiculously volatile moves, and after tumbling by over 1% overnight, were set to open higher by over 2% driven by what appears to have been another BOJ/GPIF-driven surge in the USDJPY.  Where have we seen this before? Oh yes, yesterday! Let's see if today we get a different outcome than yesterday's biggest intraday bearish reversal since Lehman.

WTI and Brent head into the North America crossover fairly flat after yesterday saw a higher than previous drawdown in API inventories (-7.3mln, prey. -2.3mIn), with sources suggesting that cushing inventories are little changed. Meanwhile, the metals complex has seen a continuation of the recent bearish trend, with many suggesting that the PBoC action is focused on the stock market as oppose to the economy as a whole, seeing precious metals generally in the red today.

Of note palladium remains in the red today after weakness yesterday saw the metal fall as much as 8% to reach 5 year lows after seeing 13 year highs last year. Palladium is generally used in gasoline engines and as a result is heavily exposed to both Chinese and US markets, with the former being the fastest growing and largest vehicle market and making up 20% of global palladium consumption. Palladium has also been weighed on by South African PGM production data yesterday, which was much higher than June and has now returned to normal levels after of 2014's 5 month strike.

Today's highlights include latest US durable goods orders, weekly DOE inventories data, comments by Fed's Dudley and the US Treasury will auction off USD 13bIn in 2y FRNs, as well as USD 35b1n in 5y notes

Market Wrap:

  • Asian stocks rise with the Nikkei 225 outperforming and the Hang Seng underperforming
  • Nikkei 225 +3.2%, Hang Seng -1.5%, Kospi +2.6%, Shanghai Composite -1.3%, ASX +0.7%, Sensex -1.3%
  • German 10yr yield down -6bps to 0.67%, Greek 10yr yield down -4bps to 9.45%, Portugal 10yr yield down -6bps to 2.67%, Italian 10yr yield down -4bps to 1.95%
  • Credit: iTraxx Main up 1.9 bps to 75.17, iTraxx Crossover up 2 bps to 345.99
  • FX: Euro spot down -0.53% to 1.1456, Dollar index down -0.2% to 94.338
  • Commodities: Brent crude up 0.1% to $43.25/bbl, Gold down -0.5% to $1134.3/oz, Copper down -2.4% to $4941/MT, S&P GSCI down -0.3%

Bulletin headline summary from Bloomberg and RanSquawk:

  • Price volatility across various asset classes failed to be contained by yesterday's actions by the PBOC, which in turn resulted in European stocks trading lower across the board
  • The USD-index continues to pare back some of its black Monday losses and resides firmly in the green ahead of the North America crossover
  • Treasuries decline amid gains in U.S. stock-index futures, steady oil; week’s auctions continue with $35b 5Y notes, WI 1.440%, lowest since April, vs. 1.625% in July.
  • Chinese police are investigating people connected to China Securities Regulatory Commission, Citic Securities and Caijing magazine on suspicion of offenses including illegal trading and spreading false information, Xinhua reported yesterday
  • Xinhua also called for efforts to “purify” the markets and carried remarks by a central bank researcher attributing rout to expected Fed hike
  • Shanghai Composite Index fell 1.3% after rising as much as 4.3%; has plunged more than 40 percent from its peak, after concerns over the Chinese economy helped snap a months-long rally encouraged by state-run media
  • The European Central Bank is becoming more aggressive in trying to procure ABS after its purchase program drew criticism from investors and traders disappointed by its reach
  • Merkel will head this afternoon to Heidenau, the eastern German town near Dresden where anti-immigrant riots erupted last week, while President Joachim Gauck is visiting a Berlin shelter in the morning
  • Turkey’s governing AK Party would fail to regain its majority in a repeat election were it to be held now, according to the most accurate pollster for the ruling party’s vote before June’s inconclusive election
  • No IG or HY deals priced yesterday. BofAML Corporate Master Index holds at +172, widest since Sept 2012; YTD low 129. High Yield Master II OAS -28bp to +590 from +614, widest since July 2012; YTD low 438
  • Sovereign 10Y bond yields lower. Asian stocks mixed, European stocks fall, U.S.equity-index futures higher. Crude oil little changed, gold and copper lower

US Event Calendar

  • 7:00am: MBA Mortgage Applications, Aug. 21 (prior 3.6%)
  • 8:30am: Durable Goods Orders, July, est. -0.4% (prior 3.4%)
    • Durables Ex Transportation, July, est. 0.3% (prior 0.8%, revised 0.6%)
    • Cap Goods Orders Nondef Ex Air, July, est. 0.3% (prior 0.9%, revised 0.7%)
    • Cap Goods Ship Nondef Ex Air, July, est. 0.4% (prior -0.1%, revised 0.3%)
  • 10:00am: Fed’s Dudley speaks in New York
  • 1:00pm: U.S. to sell $13b 2Y FRN, $35b 5Y notes
  • 7:00pm: Bank of Japan’s Kuroda speaks in New York

DB's Jim Reid completes the overnight recap

Yesterday we reiterated our view that the plates were likely to be spun again pretty soon by central bankers and lo and behold we saw a China rate cut and lower reserve requirement ratios which initially helped lift markets which were already bouncing through the early European session. However a late reversal in the US saw a 4.1% sell-off in the S&P 500 from the highs around the European close. Overall the index closed -1.35% and basically ended down at Monday's intra-day lows when chaos ensued at the open.
Following on, China has seen another volatile morning session in reaction to the PBoC easing. As we hit the break, the Shanghai Comp is +0.80%, but that’s having passed between gains and losses 8 times already with a high-to-low range of 5%. The market seemingly unsure as to how to react. The CSI 300 is +1.68% while the Shenzhen is down 0.23% after similar huge swings this morning. Elsewhere it’s generally a better start across much of Asia. The Nikkei has climbed +2.21% along with a +2.19% rise for the Kospi, while there are gains also for the Hang Seng (+0.18%) and ASX (+0.34%). Aside from further turmoil for the Malaysian Ringgit (-0.95%), it’s been a better start for most EM currencies while US equity futures are more or less unchanged. Treasury yields have ticked up another basis point while Oil markets are off to a modestly better start (+0.5%).

A bit more detail on China’s easing move yesterday. In terms of the cuts, the PBoC cut the benchmark interest rates by 25bps and the RRR by 50bps, while at the same time also removed the ceiling on interest rates for term deposits with maturities greater than one year. DB’s Chief China Economist, Zhiwei Zhang saw the cuts as broadly in line with his expectations, but of more surprise to Zhiwei was that the cuts took place yesterday evening rather than over the past two weekends. In his mind this suggests that the cuts were likely triggered by the financial market turmoil in China as well as overseas, rather than the weak economic data or capital outflows. Zhiwei continues to forecast for another RRR cut this year (and biased towards Q4) but no further cut to the benchmark interest rate. This view is based on Zhiwei’s growth outlook which he highlights may now stabilize, although acknowledges that the risks are tilted to the downside. Interestingly the PBoC press release yesterday did mention that monetary policy will become more flexible in the future and so suggestive that policy will become more data dependent.

After Tuesday's sharp declines (Shanghai -7.63%) there were also headlines suggesting that China hadn't intervened in the stock market of late and alongside the interest rate move this could be interpreted as a sign that their focus has moved from trying to get in the way of a bubble bursting to trying to ease economic conditions.

So despite more huge falls in China on Tuesday (as well as Japan), the rebound seen elsewhere in the region helped fuel a decent rally through the European session and for most of the US session. European equity markets had already rebounded some 3% prior to the PBoC announcement, but that spin of the plate helped to nudge markets up further in the session as we saw the Stoxx 600 close up +4.20%, along with similar gains for the DAX (+4.97%), CAC (+4.14%), FTSE MIB (+5.86%) and IBEX (+3.68%). Along with the S&P 500, there were similar moves lower for the DOW (-1.29%) and NASDAQ (-0.44%) also, meaning we’ve now seen six consecutive daily declines for US equities while Tuesday’s reversal from the highs was the biggest one-day correction since October 29th 2008. Putting these latest moves into perspective, the S&P 500 is now less than 20pts off of where it was at the end of 2013, or just 1% away from erasing the gains since then.

It wasn’t obvious what changed sentiment late in the US session last night. Most of the wires are pointing towards the initial optimism on the back of the PBoC easing breaking down and swiftly turning to apprehension that the move will fail to bring a sense of calm to markets there. Other commentary is pointing towards a bout of profit taking in the brief period of respite. So an unexplained move which no doubt was exacerbated by August liquidity levels. The turnaround in sentiment was also evident in US credit where we saw CDX IG tighten by as much as 5bps at one stage intraday, only to then selloff into the close and finish more or less unchanged.

Treasury yields also saw a late turnaround, with yields dropping some 6bps lower into the close but still up 6.8bps on the day at 2.072%. Prior to this, sovereign bond yields in Europe saw a decent leg higher, led by a 13.8bps move higher for 10y Bunds in particular. The US Dollar recovered some of the previous few days’ losses with the DXY finishing +1.28% while the Euro declined off its recent highs. Oil markets were choppy meanwhile, but overall closed with reasonable gains as WTI and Brent finished up +2.80% and +1.22% respectively while there were decent gains also for Aluminum (+2.37%), Copper (+2.30%) and Zinc (+1.82%).

The dataflow is something of a sideshow to the moves in equity markets at the moments but in truth it was mostly a mixed bag in the US yesterday. The S&P/Case Shiller house price index pointed to a small decrease in house prices in June (-0.12% mom vs. +0.12% expected), while the FHFA house price index printed a tad below expectations (+0.2% mom vs. +0.4% expected). New home sales in July were, although coming in below consensus, still strong (+5.4% mom vs. +5.8% expected), lifting the annualized rate up to 507k from 481k in June. The notable surprise in the data yesterday came in the form of the August consumer confidence print, which rose 10.5pts to 101.5 (vs. 93.4 expected), the second highest reading in eight years and reflective of the improved job market and lower oil prices leading up to the recent downturn in the equity market. Elsewhere, the flash services PMI reading for August declined 0.5pts to 55.2 (vs. 55.1 expected), while the August Richmond Fed manufacturing index was weak, having fallen 13pts to 0 (vs. 10 expected) and the new orders index slumping 16pts to 1.

Elsewhere, dataflow in Europe yesterday and specifically in Germany was relatively upbeat. In particular there were positives to take out of the August IFO survey which showed a 0.3pt rise to 108.3 (vs. 107.6 expected). While the expectations survey was left unchanged at 102.2, the survey of current conditions showed a 0.9pt rise to 114.8. Meanwhile Germany’s final Q2 GDP reading was left unchanged at +0.4% qoq and +1.6% yoy. Meanwhile, the ECB’s Constancio, speaking yesterday, reiterated the stance that ECB’s Governing Council ‘stands ready to use all instruments available within its mandate to respond to any material change to the outlook for price stability’.
The ECB Vice-President also played down the recent volatility in China, saying
that country’s stock market is ‘not so connected’ to activity on the ground.

Taking a look at today’s calendar now, it’s a quiet start in the European timezone this morning with just UK CBI reported sales for August due. There’s important data due out in the US however where we get July durable and capital goods orders data with lower energy-related capex and high inventory levels likely to weigh on the headline reading for the former in particular. Of more interest today and particularly in light of the subtle hints at a push back in timing from Lockhart on Monday could be the Fed’s Dudley speaking in NY later today (expected to be around 3.00pm BST), with Q&A scheduled for after.