Hong Kong

In the latest Chinese domestic financing report released by the PBOC last night, there were two divergent themes: on one hand bank loans grew far less than the expected 700Bn yuan; on the other hand total social financing soared to 1.82 trillion yuan, smashing forecasts of a 1.15 trillion increase, and the highest since June. As noted last night, this may have been the catalyst that spooked the markets, because as Bloomberg confirms, "the data shows companies are turning to alternative sources for credit given banks’ reluctance to lend."

Yesterday, when looking at the market's "Bullard 2.0" moment, which in many ways was a carbon copy of the market's response to Bullard's "QE4" comments from October 17, 2014 until just a few minutes before the market close when suddenly selling pressure appeared, we said that either the S&P would soar - as it did in 2014 - hitting all time highs just a few months later, or the "Fed is now shooting VWAP blanks." Judging by what has happened since, in what may come as a very unpleasant surprise to the "the market is very oversold" bulls, it appears to have been the latter.

Having made its warning to the Fed loud and clear ("if you hike or otherwise push the USD any higher, we will crush your markets by devaluing the Yuan against everyone but mostly the USD"), the PBOC continued the fragile ceasefure between the world's two most powerful central banks, when moments ago it kept the onshore Yuan virtually unchaged, by weakening today's fixing by 0.03% to 6.5637. However, as can be seen on the chart below, this has barely even registered.

European shares tumbled, wiping out gains from a two-day rally, Asian stocks slid and the cost of insuring corporate debt rose as investor concern over global growth prospects resurfaced. U.S. equity-index futures pared gains of as much as 0.9 percent. Government bonds rose, with yields falling to records in Japan and China amid anxiety over the world economy. U.S. crude prices stabilized after dropping below $30 a barrel on Tuesday to touch the lowest since 2003 as Iran moved closer to boosting exports.

Chinese stocks are down over 20% from Dec highs at 2-year lows, Offshore Yuan is tumbling once again, and Hong Kong Dollar is under severe pressure (with significant de-pegging risk once again).

China is untenable in its current financial position. That is the primary problem, and so long as it remains so whatever the PBOC does will have but a fleeting impact. In more immediate terms, that is being recognized by the “dollar” run which continues to savage not just China but South America (more than just Brazil), Africa, Asia (more than China) and you might even argue Canada and Mexico. From that, we see that it isn’t China that is the problem with the “dollar”, it is the whole damn system.

While Chinese New Year seasonals are undoubtedly one factor in last night's "surprisingly good" Chinese trade data, the following chart shows the level of "bullshit factor" was extreme by anyone's measure. Three years ago we first brought China's 'fake' trade data and abundant discrepancies to the public's attention and despite an apparent crackdown by regulators, the gaping difference between imports from Hong Kong and exports to Hong Kong is downright embarrassing for China's SAFE as it is clear that capital outflows are being disguised as exports with "over-invoicing" back in play.

Having apparently taken the day off from selling US Treasuries and buying Offshore Yuan (following yesterday's "murderous" short-squeeze"), completing a 40 handle round trip in the "stable" currency year-to-date, PBOC decided to hold Yuan flat for the 4th day but make a statement that they would "give policy support to exports" - in other words devalue more. The unintended consequence of their decision to withdraw liquidity and crush shorts in offshore Yuan is more problematic as it has reportedly left Chinese banks short of dollars at their ATMs (and are delaying withdrawals). Meanwhile, another of China's favorite outlets for capital outflows - Bitcoin - just got stomped.

Recall how the worthless KaloBios stock soared from almost nothing first to $10, then to $20 before finally peaking in the mid-$40s: the reason for that is that Martin Shrekli, since arrested, proceeded to buy  ever more of the KBIO float, making shorting first prohibitively expensive, and ultimately, impossible when he owned virtually all of the float. The PBOC did just that overnight...

“Everyone rational wants to sell, while everyone official has been told to buy,” said Every. “By throwing good money after bad, it just delays the inevitable.”

• Oil slips toward $30, traders bet on more falls (Reuters)
• Oil Plunge Sparks Bankruptcy Concerns (WSJ)
• RBS cries 'sell everything' as deflationary crisis nears (Telegraph)
• World stocks drop but Europe shrugs off oil slide, China money market surge (Reuters)
• Canadian Stocks Fall in Longest Slump Since 2002 as Oil Slides (BBG)
• "Murderous" Yuan Rate Jolts Hong Kong as Top Currency Hub (BBG)

With China now "murdering" Yuan shorts, markets are content that the Chinese debacle seems to be contained if only for a while, and so the attention of both traders and algos alike has focused on oil, which earlier in the session dragged global equities lower as it dropped by 3%, just shy of the $30 level, a new 11 year low, before staging another dramatic rebound in minutes, wiping out all losses in the aftermath of what appears to have been a deadly suicide bomber terrorist explosion on a square the middle of Istanbul's historic district.

A jump in the overnight cost for borrowing yuan in Hong Kong is "reflecting further PBOC efforts to stamp out speculation," according to Michael Every, head of financial markets research at Rabobank Group. Hong Kong-based Every told Bloomberg in an interview, following a massive spike in overnight borrowing rates for Offshore Yuan that "a 66% rate is murderous for others being swept up in this who are not speculating." PBOC advisor Han earlier warned that short selling the yuan "will not succeed," adding that "it is pure imagination that the Chinese yuan will act like a wild horse without any rein." But as Every notes, the unintended consequences could be a problem, "imagine you needed access to CNH for other purposes for a few days," concluding ominously that "in other EM crises we see that central banks usually win a round like this, but lose in the end."

• David Bowie, musical legend behind Ziggy Stardust, dies at 69 from cancer (Reuters)
• With No Powerball Winners, Jackpot Grows to Estimated $1.3 Billion (ABC)
• Stock Gains Short-Lived as Chinese Volatility Hurts Oil, Metals (BBG)
• China's yuan spikes higher, but stocks tumble (Reuters)
• Arch Coal Files for Bankruptcy (WSJ)
• Yuan Loan Rates Soar in Hong Kong as PBOC Halts Currency's Slide (BBG)
• China stocks close down at lowest level since September (Reuters)
• Fed Eyes Margin Rules to Bolster Oversight (WSJ)

Initially both European stocks and US equity futures were grateful that China has picked at least one asset class to prop up overnight, and rose in an extremely illiquid market with European shares gaining for first time in 4 days, as S&P futures rise even as the MSCI Asia Pacific ex-Japan index just fell to the lowest level in more than 4 years. However, as of moments ago the Stoxx 600 had faded all its earlier gains and was trading near the flatline, as an algo takes out all stops on the top and bottom once more, and looks set to move on to US futures shortly.