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China Dramatically Intervenes To Boost Stock Despite Reports It Won't; US Futtures Slump On J-Hole

Yesterday, the FT triumphantly proclaimed: "Beijing abandons large-scale share purchases", and that instead of manipulating stocks directly as China did last week on Thursday and Friday, China would instead focus on punishing sellers, shorters, and various other entities. We snickered, especially after the Shanghai Composite opened down 2% and dropped as low as 4% overnight:

We'll find out shortly just how much "China won't intervene any more in the market"

— zerohedge (@zerohedge)

Just hours after this tweet we found out that our cynical skepticism was again spot on: the moment the afternoon trading session opened, the "National Team's" favorite plunge protection trade, the SSE 50 index of biggest companies, went super-bid and ramped from a low of 2071 to close 140 points higher, ending trading with a last minute government-facilitated surge, and pushing the Composite just 0.8% lower after trading down as much as -4.0%.

SSE 50 Index of China's biggest companies rebounded 6.7% in last two hours of trading from low

— Richard Frost (@frostyhk)

It wasn't just direct stock market intervention: Bloomberg reported that additionally the PBOC also conducted another Short-term Liquidity Operations with some banks Monday, adding that tenors offered included six-day loans. Recently, the PBOC had conducted 7-day CNY60b SLO at 2.35% on Aug 28 and 140b yuan 6-day SLO at 2.30% on Aug 26.

China's interventions were to be expected: what the FT got right is that the government is intent on "providing a "positive market environment in preparation for a big military parade this week to celebrate the 70th anniversary of the “victory of the Chinese people’s war of resistance against Japanese aggression." The question is whether once the September 3 event is over, will China finally allow stocks to truly trade down. We doubt it: just like the Fed has found 7 years later when even the tiniest of rate hikes threatens to collapse the house of cards, so China will hardly dare to step away at least until the Chinese premier Li Keqiang is sacrificed, literally or metaphorically, to appease the millions who have lost everything and then some (thanks to margin).

Elsewhere in Asia, equity markets traded lower following Fed's Fischer comments over the weekend which implied that a September rate hike has not been completely ruled out. China's Shanghai Comp, despite the late government intervention, led the region lower, after reports authorities would stop supporting stock markets through large scale buying, while Nikkei 225 (-1.3%) traded in negative territory following the release of Japanese industrial output where both M/M (-0.6%) and WY (+0.2%) figures missed expectations. 10yr JGBs traded higher amid the risk off tone in Asia while the BoJ were also in the market for JPY 1.18trl of JGBs.

Utilities underperformed on the sector breakdown as European equities spend the morning in the red (Euro Stoxx -1.2%) as participants remain concerned over the ongoing volatility in Asian markets, with RWE (-2.5%) trading sharply lower following reports that one of RWE's municipal shareholders, expects the company to slash its dividend by as much as half. On the other hand, ENI (+3%) shares surged at the open after the company and also ensured that the Italian benchmark FTSE-MIB index outperformed, despite falling into the red during the morning, after the Co. announced that it has made a huge gas field discovery off Egyptian coast Lower stocks and dovish comments by ECB's Constancio, who said that the fall in oil prices is an issue with regards to inflation despite the efforts of the central banks' QE programme, kept Bunds bid, albeit marginally. However it is worth noting that trade volumes were below the usual levels given the closure of the UK's financial district due to the August bank holiday.

In FX, EUR/USD gradually moved off the best levels printed ruing the late Asian trading hours, weighed on by touted selling by macro and corporate accounts, failure to break above 0.7300 level by EUR/GBP and dovish comments by ECB's Constancio. Elsewhere, the ongoing volatility stemming from China, together with lower copper prices, saw AUD trade lower, with AUD/USD consolidating in 0.7100 area.
Going forward, market participants will get to digest the release of the latest EU CPI, which printed in fractionally hotter than expected, at 0.2%, vs consensus of 0.1%,  and the release of the latest Chicago PMI report.

In terms of Central bank speakers and news from over the weekend:

  • Fed's Fischer (Voter, Soft Dove) said the first rate-hike would come when there is "some further improvement in the labour market" while 'there is good reason to believe inflation will move higher and forces holding down inflation will dissipate further'. (WSJ) This comes after earlier comments that that it was too early to make a decision on a rate-hike in September. (CNBC/RTRS)
  • Fed's Lockhart (voter, neutral) stated that a rate lift-off is near and that it is an "open question" whether
    the members of the FOMC decide to lift interest rates now or delay until another meeting. (RTRS)
  • Fed's Kocherlakota (Non-voter, Dove) stated that he would prefer a rate hike to occur in the 2H of 2016. (Fox Business)
  • Fed Watcher Hilsenrath interpreted these comments as hawkish suggesting that the central banker did not rule out September and the point at which Fischer believes inflation will pick-up is getting closer. (WSJ)
  • ECB's Constancio (Dove) says the fall in oil prices is an issue with regards to inflation despite the efforts of the central banks' QE programme. (RTRS)
  • BoE Governor Carney (Neutral) said that a slowdown in China's economy could push down further on inflation but at this moment in time does not alter the central bank's position on when it will hike rates. (Observer)
  • SNB's Jordan stated the CHF is highly overvalued at present levels and interest rates will remain negative for a while. (RTRS)

Energy and base metals markets remained under pressure amid the ongoing supply glut in the market, as well as the slowdown in China. Nonetheless, despite the downside across the metals complex, gold prices traded relatively flat overnight with a mild gain seen amid a pullback in the greenback from Friday's highs and weakness across equity markets and are on track for their best month since January.


Bulletin Headlin Summary from Bloomberg and RanSquawk

  • Stocks in Europe traded lower, as market participants continued to fret over the ongoing volatility in Asian markets
  • Appetite for risk was dented by somewhat hawkish comments by Fed's Fischer, with WSJ's Hilsenrath subsequently pointing out that comments indicate that the central banker did not rule out September rate hike
  • Focus going forward will be on the release of the latest Chicago PMI report for the month of August
  • Treasuries diverge as decline in long yields drives curve flattening; global stocks and crude oil lower as markets await August payrolls report on Friday.
  • China’s securities regulator held meeting with representatives from 50 brokerages on Aug. 29 and told them to contribute an additional 100b yuan to support the stock market, said people familiar with the matter
  • China has decided to abandon attempts to boost the stock market through large-scale share purchases and has shifted its focus to investigating and punishing manipulators, FT reports, citing an account of unidentified senior regulatory officials speaking at a meeting on Thursday
  • Options traders have never been so pessimistic on China’s stock market, betting the government’s renewed effort to prop up share prices is doomed to fail
  • Fed Vice-Chair Stanley Fischer proclaimed his faith at Jackson Hole this weekend that inflation is poised to move upward, suggesting a September move by Fed has not been ruled out
  • The euro area’s inflation rate held steady in August, highlighting the challenge facing ECB policy makers as they seek to revive consumer-price growth
  • Democratic Senator Jeff Merkley of Oregon said he will vote to support the Iran nuclear deal, a pledge that puts Obama only three votes short of protecting the pact in Congress
  • One IG deal for $700m priced last week, no HY deals. BofAML Corporate Master Index -3 to +169 from +172, widest since Sept 2012; YTD low 129. High Yield Master II OAS -19bp to +572; reached +614 last week, widest since July 2012; YTD low 438
  • Sovereign 10Y bond yields mostly lower. Asian and European stocks mostly lower, U.S.equity-index futures decline. Crude oil falls, gold and copper little changed

US Event Calendar

  • 9:00am: ISM Milwaukee, Aug. (prior 47.12)
  • 9:45am: Chicago Purchasing Manager, Aug., est. 54.7 (prior 54.7)
  • 10:30am: Dallas Fed Mfg Activity, Aug., est. -2.5 (prior -4.6)

DB's Jim Reid completes the overnight recap

So after we put an interesting and exhausting week of huge swings in markets behind us and look forward to the next five days, any hope that we might see some calm return to markets may have to be put on hold temporarily with the last payrolls report before the September 16th/17th FOMC meeting due on Friday afternoon, giving economists, analysts and the market another chance to fine tune their liftoff expectations. Fedspeak between now and then will also take on more significance with each passing day and we can look forward to comments from Rosengren on Tuesday and Lacker on Friday. We’ve got the usual full run down of the week ahead at the end but it’s Fedspeak that we start with this morning after a bumper last few days of comments, including from Fed-Vice Chair Fischer on Saturday at the Jackson Hole symposium.

Without pinning down any specific hints on timing but still leaving the September liftoff door open, Fischer’s tone certainly felt like it weighed on the more hawkish side, saying that the Fed should not wait until it meets its inflation goal while voicing confidence that prices should head higher. Specifically, Fischer said that ‘given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further’ and that ‘with inflation low, we can probably remove accommodation at a gradual pace’ however ‘because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2% to begin tightening’. The comments came a day after a TV interview with CNBC in which Fischer noted that ‘the change in the circumstance which began with the Chinese devaluation is relatively new and we’re still watching how it unfolds, so I wouldn’t want to go ahead and decide right now what the case is – more compelling, less compelling etc’, before noting that ‘we’ve got a little over two weeks before we make the decision’ and that ‘we’ve got time to wait and see the incoming data, and see what is going on now in the economy’.

It wasn’t just Fischer we heard from at the event. Speaking on Friday, more hawkish commentary came in the form of non-voters Mester and Bullard. Mester in particular said that ‘my view so far in looking at all of the factors is that the economy can sustain an increase in interest rates’, while Bullard signaled that the volatility of the last 10 days would not be enough to change his view that the US economy can sustain a rate rise. The lone voice in the dovish camp on Friday, Kocherlakota, said that ‘I don’t see a near term increase in interest rates as being appropriate, and by near-term I mean really through the course of 2015’. Meanwhile Lockhart, speaking once again, commented that timing for liftoff ‘is close’ but that it’s an ‘open question’ whether the Fed moves now or waits a little, noting that the October FOMC is a ‘live meeting’ and ‘in play’.

So with all the comments, the probability of a September move by the Fed has now jumped to 38% from 30% at Thursday’s close. This morning we’ve seen little change in 2y (+0.6bps) or 5y (0.0bps) Treasury yields, while the benchmark 10y is down 2.1bps to 2.159%. Much of the action is again in equity markets where S&P 500 futures are down over a percent in trading this morning. It’s much the same in bourses across Asia too. Led by China once again with the Shanghai Comp (-2.61%) and Shenzhen (-2.25%) both taking another steep leg lower into the midday break, the Nikkei (-1.94%), Hang Seng (-0.77%), Kospi (-0.32%) and ASX (-1.51%) have all followed suit with material moves lower. The lower tone this morning in markets has also been reflected in the Oil complex which is down 2% as we go to print.

With regards to the moves in Chinese equities in particular, it’s hard to tell how much of this is in response to conflicting reports of state intervention in the market this morning. The FT is running an article suggesting that state-owned investment funds and institutions, which were previously boosting the stock market through large scale purchases, are set to refrain from such actions with the government switching its attention to punishing those involved in ‘destabilizing the market’. Meanwhile, according to a Bloomberg report and in contrast to the FT article, Chinese authorities are set to seek to stabilize markets before an important military parade this week, with the regulatory commission asking 50 brokerages to contribute an additional 100bn yuan to the rescue fund.

Back to the Jackson Hole gathering quickly where along with the Fed, we also got some hints into the current thinking at the BoE and ECB. Along with Fischer, the comments echoed a more hawkish tone largely. The ECB’s Constancio noted that ‘the link between inflation and real activity appears to have strengthened in the euro area recently’ and that ‘provided our policies are able to significantly reduce the output gap, we can rely on a material effect to help bring the inflation rate closer to target’. The BoE’s Carney stated that the ‘prospect of sustained momentum’ in the economy ‘will likely put the decision as to when to start the process of gradual monetary policy normalization into sharper relief around the turn of this year’. On the hot topic of the China turmoil, Carney said that ‘recent events’ there didn’t call for a change in strategy, while Constancio warned that ‘we all know about the big challenges they face, so that is a situation we monitor closely’, but hinted that no immediate shift in policy would be needed for now. Fischer was a bit more moderate in his view, noting that the Fed is monitoring developments there more closely than usual.

Prior to the commentary on the weekend, it felt like markets entered something of a calmer state on Friday relative to the volatility of the prior ten days in particular. The S&P 500 (+0.06%) finished virtually unchanged at the close having traded in a much tighter range, although in turn posted its best three-day gain (+6.5%) since November 2011. Despite trading over 5% down part way through the week, the index managed to finish in positive territory (+0.91%) for the five days, while the VIX, having closed unchanged on Friday actually managed to retreat over 50% from Monday’s intraday highs. With little change in European equity markets too (Stoxx 600 +0.28%, DAX -0.17%, CAC +0.36%), Friday’s notable price mover was again in the oil complex where we saw WTI (+6.25%) cap its biggest two-day gain since January 2009 (+17%) after climbing to $45.22/bbl, seemingly on the back on further momentum from Thursday’s gains. There was a similar rally for Brent (+5.24%) also, while the rest of the commodity space generally had a strong session with the likes of Gold (+0.76%), Aluminum (+2.76%), Zinc (+3.28%) and Lead (+3.22%) all up.

Fischer’s comments on Friday helped support another strong day for the Dollar, with Dollar index closing up 0.52% to cap a rally of nearly 3% since Monday. There was little change in 10y Treasury yields (-0.3bps) at Friday’s close, finishing the week at 2.182% and 28bps off Monday’s intraday lows. Friday’s economic data contributed to the fairly benign price action. Much of the focus was on the July PCE readings where both the deflator (+0.1% mom) and core (+0.1% mom) prints came in line with market expectations. There was some disappointment in the August University of Michigan consumer sentiment print which was revised down 1pt to 91.9, while personal income (+0.4% mom vs. expected) and spending (+0.3% mom vs. +0.4% expected) were slightly mixed.

Over in Europe we got a slightly higher than expected inflation reading out of Germany for August, with the 0.0% mom (vs. -0.1% expected) print keeping the annualized rate at +0.2% yoy after forecasts for a slight drop to 0.1%. Euro area confidence indicators were a lot more mixed for the month, with better than expected economic (104.2 vs. 103.8 expected) and services (10.2 vs. 8.8 expected) readings, but softer industrial (-3.7 vs. -3.2 expected) and business climate (0.21 vs. 0.34 expected) indicators. UK Q2 GDP offered little in the way of surprise, unrevised at +0.7% qoq as expected with the annualized rate at +2.6% yoy.

Staying in Europe, as well as the obvious Fed progress to watch in September, Greece’s election campaign is set to garner further attention as we approach the end of the month. The first set of polls released over the weekend suggest that support for Tsipras’ Syriza party is dwindling somewhat. A poll run for Agora newspaper showed Syriza with 24.6% of total votes, a lead of 1.8% over New Democracy while a poll for Alpha TV showed Syriza with a lead of 2.1% and a Proto Thema poll suggested the lead is as small as 1.5%, opening up the possibility of messy coalition talks and a long way from the 15% lead Syriza held over its main rival back in May.