Yuan

It is unclear what precipitated it (some blamed China concerns, fears of rate hikes, commodity weakness, technical picture deterioration although  it's all just goalseeking guesswork) but overnight S&P futures followed yesterday's unexpected slide following what were explicitly dovish Fed minutes, and took another sharp leg lower down by almost 20 points, set to open below the 200 DMA again, as the dazed and confused investing world reacts to what both the Treasury and Oil market signal is a deflationary deluge. Indeed, oil is about to trade under $40 while the 10Y Treasury was last seen trading at 2.07%. Incidentally, the last time oil was here in March of 2009, the Fed was about to unleash QE 1. This time, so called experts are debating if the Fed will hike rates in one month or three.

Last year, when alternative economic analysts were warning that the commodities crush and oil crash just after the taper of QE3 were blaring signals for a downshift in all other financial indicators, the general response in the mainstream was that we were overreacting and paranoid and that the commodities jolt was temporary. Perhaps the fact needs repeating that it’s not paranoia if they are really out to get you. Only a short time later, it is truly amazing how the rhetoric from the mainstream economic yes-men is changing. So now that the mainstream is willing to report on clear economic dangers, what happens next?

The PBOC set the Yuan fix 0.08% stronger - the biggest 'strengthening' in 2 months, which is interesting because The IMF's confirmation of a delay to Yuan inclusion in the SDR basket to Oct 2016 (pending a year-end decision) asked for more flexibility. For the 3rd day in a row, The PBOC injected massive liquidity (120bn today, 110bn yesterday, 120bn Monday). Shanghai margin debt declined for a 2nd day in a row and Chinese stocks look set to open weaker.

Facing a growing public backlash and seeking to deflect charges that the government is complicit in a massive coverup of a completely avoidable disaster that ultimately caused the deaths of more than 100 people, Beijing has compelled the Party-affiliated majority shareholders of Tianjin International Ruihai Logistics to admit their role in circumventing restrictions on the storage and handling of hazardous chemicals.

Even before the latest shot across the bow in the escalating global currency wars, EM FX was beset by falling commodity prices, stumbling Chinese demand, and a looming Fed hike. And while, as Barclays notes, "estimating the global effects China has via the exchange rate and growth remains a rough exercise," more than a few observers believe the effect may be to spark a Asian Financial Crisis redux. For their part, BofAML has endeavored to compare last week’s move to the 1994 renminbi devaluation, on the way to drawing comparisons between what happened in 1997 and what may unfold in the months ahead.

If there was any confusion as to whether the recently devalued Chinese yuan would be landing in the IMF SDR basket on January 1, the Fund just cleared it up.

Now that the PBoC has created a situation where it’s forced to prop up the yuan via open FX ops just about as often as it’s forced to prop up the SHCOMP via China Securities Finance, concerns are growing about liquidity and a severe tightening of money markets, prompting the PBoC to inject hundreds of billions in emergency funding.

• $1 trillion in Emerging Market outflows in the past 13 months (FT)
• German lawmakers back third Greek bailout (Reuters)
• Dutch government faces test in "junkie" Greece debate (Reuters)
• China c.bank offers selected banks medium term lending facility (Reuters)
• Another "expert network" busted: Promontory settles over StanChart probe (FT)
• Angola to Ship Most Crude in Four Years to Meet Asian Demand (BBG)
• Hackers dump data online from cheating website Ashley Madison (Reuters)
• Yuan’s Devaluation Brings Losses for Some (WSJ)

With China's currency devaluation having shifted to the backburner if only for the time being, all attention was once again on the Chinese stock market roller coaster, which did not disappoint: starting off with yesterday's dramatic 6.2% plunge, the Shanghai Composite crashed in early trading, plunging as much as 5% in early trading and bringing the two-day drop to a correction-inducing 11%, and just 51.2 points away from the July 8 low (when China unleashed the biggest ad hoc market bailout in capital markets history) . And then the cavalry came in, and virtually the entire afternoon session was one big BTFD orgy, leading to a 1.2% gain in the Shanghai Composite closing price, while Shenzhen and ChiNext closed up 2.2% and 2.7%, respectively.

UPDATE: At the end of the morning session there is more blood on the streets as The PPT never turned up... Chinese stocks are now down 10-12% since Monday's close.

Following yesterday's massive CNY120bn liquidity injection - the largest since Jan 2014 - and the notable absence of the plunge protection team in the afternoon rout ("we're only here for emergencies"), we note that margin debt fell for the first time in 8 days as Chinese farmers and grandmas realized once again that the stock market is not a free-ride to nirvana. Chinese stock futures indicate the losses will be extended at the open (SHCOMP -2.7%) as the Yuan fix is held unchanged.

Between micromanaging the economy, equities, the yuan, and public opinion, there's no question that China has its hands full these days. But with everyone's attention now focused sqaurely on Beijing's plunge protection team and the PBoC's "controlled" yuan devaluation, the market may be ignoring the biggest risk of all...

As it turns out it is not just in the US that the "smart money" is bailing out as fast as it can: according to Bloomberg, the wealthiest investors in China’s stock market are also scrambling for the exits. To wit: "The number of traders with more than 10 million yuan ($1.6 million) of shares in their accounts shrank by 28 percent in July, even as those with less than 100,000 yuan rose by 8 percent, according to the nation’s clearing agency. While some of the drop is explained by falling market values, CLSA Ltd. says China’s rich have taken advantage of state buying to cash out after the nation’s record-long bull market peaked in June."

The story behind the deadly chemical explosion that rocked China’s Tianjin port last Wednesday continues to evolve amid fears that the public could be at risk from the hundreds of tonnes of sodium cyanide stored at the facility. Indeed, new samples show that the cyanide level in the water around the site is some 28 times the safety standard. It looks as though determining who actually owns Ruihai will be complicated by the fact that in China, it’s not uncommon for front men to hold shares on behalf of a company’s real owners. In an effort to pacify the country’s censored masses, party mouthpiece The People’s Daily said 10 people, including the head and deputy head of Ruihai had been detained since Thursday. Finally, initial estimates put the cost of the blast at bewteen $1 billion and $1.5 billion.

It is not enough to issue proclamations such as “it is time to get tough” or “It is time to make America great again”. These are the buzz words of a man that is reaching out to tap the rich vein of popular appeal. Perhaps that is what all politicians strive to do, especially when the field of candidates is rather crowded. However, what is clear is that a well-crafted economic strategy is not present, nor are staffers that would have the temerity to disagree with Mr T.

Given the carnage unfolding across EM currencies and the myriad headwinds the world's emerging economies face going forward, it should come as no surprise that sentiment has turned decisively negative. Is it time to be a contrarian? BofAML thinks so.