"China's exchange rate reform had nothing to do with the global stock market volatility, it was mainly due to the upcoming U.S. Federal Reserve monetary policy move," Yao said. "We were wronged."
Crash waves are notoriously volatile – several of the biggest one day rallies in history have occurred before and during crash waves. This makes short term forecasting even more of a coin flip than it normally is. However, we believe it is important not to lose sight of the forest for the trees; stock markets around the world have been in bubbles driven by extremely loose monetary policy, which ipso facto allows us to identify them as an example of artificial price distortion. Such bubbles always collapse sooner or later – unless the monetary authority decides to simply destroy the currency it issues, as has happened in Zimbabwe and is currently happening in countries like Venezuela and to a slightly lesser extent Argentina. We don’t expect the central banks of the developed nations to follow suit, at least not yet.
In the past week, ever since the Fed's FOMC minutes which sent the S&P tumbling from 2100 to their lows in the overnight session, some 13% lower, the US economy underwent the functional equivalent of a 15 bps rate hike, or more than half the rate hike that the Fed has been so terrified to engage in for years.
Lost in all the stock market focus is the renewed disaster being signaled across credit markets, “inflation” expectations in particular. Here oil prices and the “dollar’s” darkening intersect with credit and broad financial settings. Quietly, market-based measures of the anticipated future “inflation” path have crashed. It can no longer be transitory, which extrapolates nowhere good for monetary policy, orthodox economics and the actual global economy. The theme for several years now has been that “they don’t know what they are doing” and once more we find that proven by “unexpected” events that were perfectly predictable outside the orthodox bubble.
"Policymakers responded to the financial crisis with easy monetary policy and low interest rates. The critics — including us — argued against 'solving a debt crisis with more debt.' Put differently, we said that QE was necessary, but not sufficient for a recovery. We are now coming to the moment of reckoning: central bankers look naked, and markets have nothing else to believe in."
Here We Go Again: US Equities Surge Even As Chinese Stock Market Rollercoaster Tumbles To 8 Month LowSubmitted by Tyler Durden on 08/26/2015 08:16 -0400
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 watching in horror as the central bank and government lose control, and everything they throws at the biggest market bubble of 2015 does absolutely nothing.
China Devalues Yuan To Fresh 4-Year Lows, Arrests Top Securities Firm Exec As Stocks Slide Despite Rate CutsSubmitted by Tyler Durden on 08/25/2015 22:17 -0400
Update: Chinese Police arrested managing director Xu Gang of China's No.1 brokerage CITIC Securities
The Asia morning begins mixed in stock markets, The PBOC explains itself "this is not a shift in monetary policy," - except it is the first such set of measures since 2008, further deleveraging as China margin debt drops CNY1 Trillion from June peak to lowest since March, Regulators begin probing securities firms (and their malicious short sellers), Index futures trading fees will be raised and trading positions restricted. Stocks are limping only modestly higher (after the rate cuts) as Yuan is fixed at 6.4043 - the lowest since August 2011.
Although we've talked plenty about the impact of the yuan deval on Asia-Pac and LatAm, we haven’t yet mentioned India where yesterday, in the midst of the turmoil, central bank governor Raghuram Rajan sought to calm nervous markets by reassuring the world that India is not, for now anyway, in any danger thanks to ample FX reserves and a low CA.Be that as it may, economic realities are economic realities and a currency war is a currency war, which is why, we suppose, the Indian government’s chief economic advisor Arvind Subramanian thinks the country might just have to hit back.
Because no discussion of global dollar pegs and entrenched FX regimes would be complete without mentioning the Hong Kong dollar...
Hold onto your bootstraps. Markets are setting themselves up for a surprise as the Fed is still likely to hike rates in September. Today’s ‘risk-on’ move is a function of those expecting delay. Rising levels of market volatility are here to stay and will be magnified by this ‘surprise’. Those ignoring the warnings of a rate hike by Fed officials do so at their own peril.
What we’ve been experiencing in markets is the plain and simple fear that always accompanies a broken story. The human reaction to a broken story is an emotional response akin to a sudden loss of faith. It’s a muted form of what Stephen King defined as Terror … the sudden realization that the helpful moorings you took for granted are actually not supporting you at all, but are at best absent and at worst have been replaced by invisible forces with ill intent. The antidote to Terror? Call the boogeyman by his proper name. It’s the end of the China growth story, one of the most powerful investment Narratives of the past 20 years. And that’s very painful, as the end of something big and powerful always is.
The missing clue came from a report by SocGen's Wai Yao, who first summarized the total liquidity addition impact from today's rate hike as follows "the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today's onshore exchange rate." And then she explained just why the PBOC was desperate to unlock this amount of liquidity: it had nothing to do with either the stock market, nor the economy, and everything to do with the PBOC's decision from two weeks ago to devalue the Yuan. To wit:" In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August."
The dual policy rate cut is a desperate attempt to i) free up liquidity, and ii) shore up confidence in the stock market. We suspect the effects may be short lived on both accounts because after all, aggressive easing only fuels further depreciation necessitating further liquidity-sapping FX interventions in a vicious loop, and loose monetary policy likely won’t be much comfort to China’s 90 million retail investors who now, more than ever before, are virtually guaranteed to sell any rip they can get in a desperate attempt to claw back their life savings which they naively poured into stocks back in April and May.
- China’s Central Bank Cuts Interest Rates (WSJ)
- Chinese Stocks Crash Again to Extend Biggest Plunge Since 1996 (BBG)
- China cuts rates, reserve ratio to aid economy as stocks sink (Reuters)
- Wall St. suffers worst day in four years, S&P confirms correction (Reuters)
- Europe's Stocks Head for Best Day Since 2011 (BBG)
- Market turmoil clouds Fed rate outlook (FT)
- For All Its Heft, China’s Economy Is a Black Box (WSJ)
- CHINA PBOC CUTS INTEREST RATES
- CHINA PBOC CUTS REQUIRED DEPOSIT RESERVE RATIO
- CHINA PBOC CUTS 1Y DEPOSIT RATE BY 25 BPS
- CHINA PBOC CUTS 1Y LENDING RATE BY 25 BPS
- CHINA PBOC CUTS BANKS DEPOSIT RESERVE RATIO BY 50 BPS