Trade Balance

Almost two weeks after we explained why any hope for a QQE boost by the BOJ is a myth, and that any increase in monetization will simply lead to a faster tapering and ultimately halt of Kuroda's bond purchases the market finally grasped this, when overnight the BOJ not only did not easy further as some - certainly the USDJPY - had expected, but kept its QE at the JPY80 trillion level and failed to offer any hints of further easing that many had hoped for, pushing the Nikkei down from up almost 400 point intraday to virtually unchanged and sending the USDJPY back under 120. JGBs also traded lower on concerns there may not be much more QE to frontrun.

And to think all it took was Gartman going short of stocks in 25% correction terms yesterday...

The last time we looked at Chinese stocks, just a few hours ago, they were on pace to close back under 3000, following the latest collapse in trade, where in August exports dropped 5.5% (last -8.3%) while imports tumbled -13.8% in dollar terms (worse than the -8.1% prior). As the Reuters chart below shows, this was the 10th month in a row of declines and the worst stretch since the 2008 crisis, confirming China will need far more currency devaluation to stabilize the trade pain. And then Chinese authorities intervened with gusto, waiting until the start of the afternoon session, at which point a massive buying orgy ensued, and pushed the SHCOMP from down more than 2% to close at the day highs, up some 2.9%!

Chinese stocks opened with a bang, and as we previously noted soared higher at the open after China's long 4-day holiday weekend, which however subsequently slowly (but very surely) fizzled, eating away at the hope that the 3-day drop in the Shanghai Composite would finally come to an end following comments from PBOC governor Zhou that the recent rout in Chinese stocks is almost over, and result in a relief rally in Europe and the US. Alas, all that was promptly swept away at the end of trading in China when the Shanghai Composite tumbled at close of trading to confirm just how unpleasant a "death cross" is coupled with loss of central bank control, and to push the Shanghai Composite down 2.5% for the day and 3.4% for the year.

Moments ago, US equity futures tumbled to their lowest level in the overnight session, down 22 points or 1.1% to 1924, following both Europe (Eurostoxx 600 -1.8%, giving up more than half of yesterday's gains, led by the banking sector) and Japan (Nikkei -2.2%), and pretty much across the board as DM bonds are bid, EM assets are all weaker, oil and commodities are lower in what is shaping up to be another EM driven "risk off" day. Only this time one can't blame the usual scapegoat China whose market is shut for the long weekend.

News That Matters

With China closed today, the usual overnight market manipulation fireworks out of Beijing were absent but that does not meant asset levitation could not take place, and instead of the daily kick start out of China today it has been all about the ECB which as we previewed two days ago, is expected - at least by some such as ABN Amro - to outright boost its QE, while virtually everyone else expects Draghi to not only cut the ECB's inflation forecast, which reminds us of the chart which in March we dubbed the biggest hockeystick ever (we knew it wouldn't last) but to verbally jawbone the Euro as low as possible (i.e., the Dax as high as it will get) even if the former Goldmanite does not explicitly commit to more QE.

It's a busy week for the market, and not to mention the Dow Jones-dependent Fed, which will have to parse through reports on Chicago PMI, Construction Spending, ISM (Mfg and Services), ADP, Productivity and Labor Costs, Factory Orders, Trade Balance, and the weekly highlight: Friday's Jobs reports.

Just hours after the PBOC announced a modestly "revalued" fixing in the CNY, which curiously led to weaker trading in the onshore Yuan for most of the day before a forceful last minute intervention by the central bank pushed it back down to 6.39 it was the local stock market spinning plate - which had been relatively stable during the entire FX devaluation process - that China lost control over, and after 7 days of margin debt increases the Shanghai Composite plunged by 6.2% in late trade, tumbling 245 points to 3748, just 240 points above its recent trough on July 8, a closing level some 27% off its June peak.

It was a quiet start to the week today with just the June Euro area trade balance (which rose €21.9bn vs €23.1 bn expected, up from €21.3 bn) in the European timezone and Empire manufacturing and NAHB housing market index for August this afternoon in the US. Under the radar, but perhaps the most news today, is the June TIC data which will likely confirm the ongoing liquidation of "FX Reserves" aka TSYs by "Belgium" aka China. Expect another $15-20 billion drop in Belgian Treasury holdings in the month of June.

For reasons that will forever remain a mystery to us, mercantilism and protectionism actually hold enormous popular appeal. The best explanation we can come up with for this phenomenon is that the support for such policies is based on a mixture of economic ignorance and relentless propaganda by vested interests over the past, say, four centuries. Still, it is almost comical that people are so vociferously clamoring for policies that can actually cost them a fortune and will definitely lower their standard of living.

• China central bank tries to soothe global markets, says no reason for yuan to fall further (Reuters)
• Huge blasts at Chinese port kill 44, with hundreds injured (Reuters)
• China efforts to slow yuan fall hoist Europe shares, bond yields (Reuters)
• Greek Economy Unexpectedly Surged Before Capital Controls (BBG)
• Joe Biden Is Sounding Out Allies About a 2016 Bid (WSJ)
• U.K. Tries to Kick-Start Shale Gas With Planning Speedup (BBG)

Following last week's bad news for the economy (terrible ADP private payrolls, confirmed by a miss in the NFP) which also resulted in bad news for the market which suffered its worst week in years, many were focused on how the market would react to the latest battery of terrible economic news out of China which as we observed over the weekend reported abysmal trade data, and the worst plunge in Chinese factory prices in 6 years. We now know: the Shanghai Composite soared by 5%, rising to 3,928 and approaching the key 4000 level because the ongoing economic collapse led Pavlov's dog to believe that much more easing is coming from the country which as we showed last night has literally thrown the kitchen sink at stabilizing the plunge in stocks.

"The future is unknown and we are not dealing with markets that are free markets anymore...now we have government interventions everywhere. [But] in the last say twelve months, I have observed an increasing number of academics who are questioning monetary policies. That's why I think they will take the gold away and go back to some gold standard by revaluing the gold say from now $1000/oz to say $10,000 dollars. An individual should definitely own some physical gold. The bigger question is where should he store it? because... the failure of monetary policies will not be admitted by the professors that are at central banks, they will then go and blame someone else for it and then an easy target would be to blame it on people that own physical gold because - they can argue - well these are the ones that do take money out of circulation and then the velocity of money goes down - we have to take it away from them... That has happened in 1933 in the US."

Here comes today's main event, the July non-farm payrolls - once again the "most important ever" as the number will cement whether the Fed hikes this year or punts once again to the next year, and which consensus expects to print +225K although the whisper range is very wide: based on this week's ADP report, NFP may easily slide under 200K, while if using the non-mfg PMI as an indicator, a 300K+ print is in the cards. At the end of the day, it will be all in the hands of the BLS' Arima X 12 seasonal adjusters, and whatever goalseeked print the labor department has been strongly urged is the right one.