BOE

The Shanghai Composite Index had dropped as much as 3.8% to a 4 month low before the news that the cops were going to arrest anyone who was caught "maliciously shorting stocks", when everything suddenly took off, and the SHCOMP closed  a "Dramamine required" 5.8% higher, the biggest daily increase since March 2009! Stocks around the globe followed, with US equity futures wiping out much of yesterday's losses and up 1% at last check.

You might be tempted to suspect that the inevitable unwind of a completely unsustainable margin mania is to blame for the brutal selling that has cost Chinese shares some $3.5 trillion in market value over the last three weeks. But you’d be wrong, according to several Chinese newspapers. 

Over the past two weeks, China has resorted to an eye-watering array of policy maneuvers and pronouncements in a desperate attempt to resurrect the country's margin-fueled equity bubble. Amid the chaos, Morgan Stanley — whose "don't buy this dip" call might well have been the straw that broke the dragon's back, so to speak — is out with a detailed history of Beijing's plunge protection playbook.  

More than even the unfolding "chaos theory" pandemonium in Greece, market watchers were even more focused on whether or not China and the PBOC will succeed in rescuing its market from what is now a crash that threatens social stability in the world's most populous nation. And, at the open it did. The problem is that as the trading session progressed, the initial 8% surge in stocks faded as every bout of buying was roundly sold into until every other index but the benchmark Shanghai Composite turned sharply red.

Initial conditions matter when contemplating impact of Greek referendum

When it comes to Europe, Greece lost the blame game, and just like the Ukraine civil war last year, became an unwitting catalyst greenlighting Germany's concession to ECB QE, this time it may be Greece that launches the next step in the ECB's master plan: not just QE but more QE. This is precisely what Goldman's Franceso Garzarelli, co-head of macro and markets research, admitted earlier today in an interview on Bloomberg TV, when he said that the ECB "will have to go big" if the situation in Greece worsens and leads to wider peripheral bond yield spreads.

"The positive wealth effect of the equity market on consumption or aggregate demand is limited in China, but an equity market collapse would hurt millions of mid-class households and pose great danger to the economy and social stability."

Chaos reigns, with contradictory headlines pushing and pulling futures in any one direction, only for the next headline to undo the previous one. And only headline scanning frontrunning algos have any chance of trading any of this...

Before taking a look at Europe, an update on China. Just a few short hours ago, when looking at the bursting of the Chinese bubble where stocks were down between 3% and 5% across the board in the first post-holiday trading session after the worst week in 7 years, we said that "without assistance (levitation) from the same PBOC that just clamped down on liquidity, the China bubble has burst." And then as if by request, minutes later we got, drumroll, levitation and the stickiest stick-save by the PBOC seen in months, when the Shanghai Composite staged an unprecedented 7% surge from the lows to close 2.2% higher after tumbling as much as 5% earlier in the session. And just like that, faith in the "wealth effect" is preserved.

With the Fed's June FOMC statement in just over 7 hours and a Yellen press conference to follow shortly, one in which nobody expects the Fed will announces its first rate-hiking cycle in nine years despite repeated clues by Yellen that not only is there froth in the market but that the Fed has no dry powder to contain the next crisis when it emerges (even though a rate hike will catalyze the next crisis), traders have chosen to ignore the chatter from Greece which is getting worse by the hour, and unlike recent days, have bought risk overnight based on one simple technical: of the five press conferences in ten Fed meetings held by Yellen as Chairman, the S&P finished higher 80% of the time.

European shares remain lower, close to intraday lows, with the banks and autos sectors underperforming and food & beverage, retail outperforming. Tsipras hardens Greek stance after collapse of bailout talks. The Italian and Swedish markets are the worst-performing larger bourses, the U.K. the best. The euro is weaker against the dollar. Greek 10yr bond yields rise; Spanish yields increase. Commodities decline, with copper, nickel underperforming and natural gas outperforming. U.S. Empire manufacturing, net TIC flows, NAHB housing market index, industrial production, capacity  utilization due later.

Mark Carney: "Real markets are essential to guarantee prosperity. Not markets that collapse when there is a shock from abroad. Not markets where transactions occur in chat rooms. Not markets where no one appears accountable for anything."  So... not markets which are artificially rigged by $22 trillion in central bank liquidity and which collapse every time the "threat" that any of this preciously liquidity may be taken away?

After a Chinese session which following the MSCI failure to include Chinese stocks in its EM index, if only for the time being, was largely a dud with Shanghai stocks actually dropping by 0.1% after a late day selloff, eyes turned to Europe, which once again did not disappoint and where the bond rout continued apace, with the 10Y Bund yield spiking just after the European open, and rising above 1.05%, the widest level since September 19, before recouping some losses and trading just around 1.00% at last check.

After yesterday's unprecedented volatility fireworks across all markets and continents, today so far has been a modest disappointment, with no crashes and subsequent surges in China, where the Politburo's only achievement was keeping the bubble dream alive by pushing the Shanghai Composite over 5,000 for the first time since January 2008, closing the index 1.5% higher on the day - a very modest gain by China's recent blow-off top standards.  Europe, too, has been relatively tame with the 10 Year Bund starting off on the wrong foot, the yield rising back above 0.91% before once again dipping to the upper 0.8% range, tracking the move in the EURUSD tick for tick, which also is a tractor beam for the US 10 Year. On the equity, front, things are just as muted, with futures at the Low of Day as of this moment, despite yesterday's last minute manic buying spree, the S&P set to open below 2100 as a result.

For once Mario Draghi was right. A day after the European central bank head warned of a spike in volatility, volatility did just that, with markets everywhere from China to Europe seeing volatility explode.