US Traders Walk In To Another Bloodbath

Tyler Durden's picture

Lots of sellside squeals this morning following the epic bloodbath in China, where in addition to what we already covered hours ago, has seen at least five companies  (China Development Bank, Shanghai ShenTong Metro, China Three Gorges Corp., Doosan Infracore China Co. and Chongqing Shipping Construction Development) delay or cancel bond offerings as the PBOC's admission of capital "misallocation" is slowly but surely freezing both bond and stock markets. And while the plunge was contained first to China, then to Asia, then to Europe (where the Spanish 10 Year once again surpassed 5% as expected following the carry trade unwind), with the arrival of bleary-eyed US traders the contagion is finally coming home.

In a redux of last week, 10 Year yields are shooting up, hitting as high as 2.63% a few hours ago, while equity futures are now at the lows of the session. It could turn very ugly, very fast, especially if the Hamptons crowd were to actually read the stunning BIS annual report released on Sunday, which not even Hilsenrath explaining "what the BIS really meant" will do much to change the fact that the days of monetary Koolaid are ending.

DB's Jim Reid summarized the angst among Wall Street quite well earlier:

There was plenty of weekend news to digest but most of it seemed to circle around three main themes: China, the implications of June’s FOMC and the situation in EM. Starting with China, domestic financial stocks (-4.0%) are seeing sharp losses this morning amid ongoing news flow around liquidity tightness in the interbank  market.

In terms of the latest on bank liquidity, the PBoC posted a statement on its website today that said banking system liquidity remains at a “reasonable level”, but warned that Chinese banks must control liquidity risks from credit expansion. This came after China Development Bank, the country’s policy bank became the latest institution to cancel a bond sale (originally scheduled for tomorrow). The official state news agency, Xinhua, wrote over the weekend that "it is not that there is no money, but that the money has not reached the right places". The article suggested that a misallocation of funds into wealth management products had caused the tightness in liquidity in some banks. Indeed, Fitch noted last Friday that more than CNY1.5 trillion in WMPs - substitutes for time deposits - will mature in the last 10 days of June. Issuance of new products, and borrowing from the interbank market, are among the most common sources of repayment for maturing WMPs, and the recent interbank liquidity shortage complicates both.

China's mid-tier banks, are likely to face the most difficulty says Fitch, with an average of 20%-30% of total deposits in WMPs. This compares with 10%-20% for state-owned and city/rural banks. Fitch also noted that the PBOC’s hands-off response in easing the recent tight monetary conditions reflects in part a new strategy to rein in the growth of shadow finance by constraining the liquidity available to fund new credit extension.

Elsewhere in the region, we are seeing a continuation of the weakening trend in EM bonds and local currencies. Asian EM sovereign bonds and CDS are about 5-10bp wider to start the week. China CDS has given back more than what it gained on Friday and is 10bp wider overnight. Most currencies continue to weaken against the USD and the dollar index is 0.4% higher this morning. The Nikkei (-1.2%) is outperforming on a relative basis, helped by a 0.5% rise in USDJPY, after PM Abe's Liberal Democratic Party won a sweeping election victory on Sunday.

The LDP secured an overall majority in the 127-seat Tokyo metropolitan assembly with its coalition partner the New Komeito party. The victory is seen as a good sign for Abe’s government as it heads into upper house elections next month.

Returning to Friday’s session, for much of the day we had a continuation of the momentum that has gripped markets since last Wednesday’s FOMC. Indeed, the S&P500 was languishing at a low of -0.68% early in Friday’s session and was
poised to close weaker for the third straight session, before staging a comeback on the back of a couple of Fed headlines. The first set of headlines suggested that the Fed could delay QE tapering if worsening financial conditions, in the form of rising bond yields and lower stock prices, hurt the economy. There wasn’t much detail behind the headlines though, and the Fed sources were unnamed. As we discussed in our EMR on Friday, volatile markets could keep the Fed on hold for longer than they and the market now think. We continue to expect a difficult few weeks for risk followed by a realisation that the pace of tapering will actually be slower than flagged on Wednesday which in turn will eventually provide some good buying opportunities before the summer is out.

Several minutes after the first Fed headlines hit screens, the WSJ’s Hilsenrath was on the newswires again suggesting that the market had overlooked a number of dovish signals in Bernanke’s post-FOMC press conference. These signals included the Chairman hinting that rate rises would be gradual, and that “a strong majority” of Fed officials had concluded the Fed won’t ever sell its growing portfolio of mortgage-backed securities. This was followed by dovish comments from the Fed's Bullard who said on Friday that the decision to taper was “inappropriately timed” because inflation and economic output has been soft. Interestingly, 10yr yields continued to push higher despite the headlines, and managed to cross the 2.5% mark in the final minutes of Friday’s trading (closing 11bp higher at 2.53%). Selling pressure continued in EM equities despite the better tone in US equities. The MSCI EM index closed 0.88% weaker for its 4th straight loss. Across the EM world, bonds and currencies were generally weaker amid negative reports of outflows. Mexican and Turkish 10yr yields added 11bp and 32bp respectively.

Turning to the day ahead, we have little on the radar today outside of the latest monthly German IFO survey. Indeed, we have a relatively quiet week ahead of us compared with the events which have transpired over the course of the past seven days. Tomorrow, the data flow begins to pick up with US durable goods orders, new homes sales and consumer confidence in the US. On Wednesday, the third and final estimate of US Q1 GDP is scheduled. On Thursday, the UK’s Office for National Statistics will release its annual revisions of past data alongside its third estimate of first-quarter GDP. Other data on Thursday include US personal income /consumption and jobless claims together with an update on German employment. The 2-day European Council/EU Leader's summit starts on Thu with the agenda to consider country specific recommendations on economic policy + bank supervision. To round out the week, Japanese CPI, industrial production, unemployment and retail trade for the month of May is due out on Friday. In the US, the Chicago PMI will also be released on Friday. With the focus on yields, and the patchy demand in recent auctions, it worth keeping an eye on the UST auctions this week: We have US$35bn in 2-year notes on Tues, $35b of 5-year notes on Wed and $29bn in 7-year bonds on Thu. In addition, we get another round of post-FOMC Fedspeak with Fed Governor Powell and Atlanta FedPresident Lockhart speaking on Thursday, followed by regional Fed presidents Lacker, Pianalto and Williams on Friday.

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Haus-Targaryen's picture

Time for Bernank to hit cmd + P to solve this problem, clearly. 

jpc578's picture

Get to work, Mr. Chairman.

King_of_simpletons's picture

We are not in a bubble. Repeat .... not in a bubble.

Frozen IcQb's picture

No self serving politician can withstand a 3000 point drop in the Dow combined with normalized bond yields. It ain't going to happen. The dollar will break before interest rates.

kaiserhoff's picture

Unless they simply can't hold it anymore,

which looks like what is happening in China and Asia in general.

Frozen IcQb's picture

China's letting out some steam. Sooner or later, Li Kekiang will have to compete with the Bernank and Kuroda.

eddiebe's picture

Looks to me like they already are, in spades. No wonder the chinese people are lining up to buy gold.

GVB's picture

Sir Bernanke would be stupid enough to pull his helicopters EJECT handle. And YES, HIS helicopter has one.

fonzannoon's picture

listeninging to Bernanke tell us rates will not rise quickly reminds me of Leslie Nielson's nose growing while telling everyone to not panic.


GetZeeGold's picture



Looks like I picked the wrong week to stop sniffin glue.

GVB's picture

Good, FED could use some glue now;

RSloane's picture

You called this yesterday Fonz. We'll know more after the 1 PM EST trading starts, but so!

fonzannoon's picture

what is going to suck is when I have to buy kito a sandwich because the fed announces QE6 to combat this mess they created and somehow gold drops to $900 on the announcement.

Either, as Doc said below, a controlled demolition will have to turn into a wrecking ball to get everyone back in line, or, amazingly we just march higher and higher in yields, which is starting to take on a life of it's own. This is crazy.

Damn did I just see 2.64%? WTF


Bearwagon's picture

Harrumph! ... is this thing on? ... Attention, please! This is an announcement to all passengers of the bearwagon (which means I'll break out into an outright rant):

What was the matter with stock markets, gold and bonds? Why did they drop like that? The lamestream-Media, of course, provide an answer to that question: It's the Bernanks fault! This blackguard! He uttered terrible things after the FOMC-meeting, and that's why everything that could be sold was sold immediately. Personally, I'd say that this argumentation is a little short, if it is not complete baloney.
I think it was something quite different, that was crucial for the retreat of prices: It was a somewhat rare, extraordinary line-up, that Jackson Hole was preceding a big OPEX day in such short a time. ('Big' meaning that it was also futures expiration day.) That was the reason, why the stock market fell like it did wednesday to friday.
The big gamblers with much capital  -mostly banks, dealing as principals, or great hedge funds-  act as option writers. Which means, that it's them, who sell options to the market participants. Their target is, of course, that all these option expire worthless, so they could rip-off the whole selling price as their profit. If that fails, the losses can be dramatic, up to ten times the selling price. But that can be avoided.
How? Well, by exploiting the simplicity of the average market participants. They generally like to go with the flow. Consequently, they like to buy options, which generate profits if the prevalent trend just continues. They can always count on the support of the lamestream-media. So, since last OPEX-day in May, calls have been quite popular. How couldn't they, when everyone was talking about DOW 17000 and markets rising for all eternity.
Of course there are some bears, who dare to buy puts, but they are few and don't have that much money - they just don't matter at all.
So what would you have done, were you one of the big players? It would have been most pleasant for you, if the market would reverse it's trend and go down. I mentioned that in a short comment. It is not impossible at all, for big players, to influence the trend. Mind you, that they are all in the same boat and on the same side of it. They all sell calls during an upward trend - and would be very pleased if prices could drop significantly.
Had there been a rallye, the great adresses would have been forced to adjust their quite complex positions (extended through certificates, OTC-trades or futures)to a rising market. In that case, the prices would not have risen a little, but very massively, because those adjustments would have intensified the upward trend.
Didn't happen. They succeeded in changing the direction, and all the puzzled investors and daytraders jumped upon the bandwagon. Until friday evening - no more pressure was necessary afterwards. So - if we agree, that the central banks simply cannot taper all they want and that the crash in the market was mostly caused by that big OPEX-day - if we recognize, that the high-rollers quite dedicatedly try to move the market where the majority doesn't expect it to go, then we have to ask the question: What's the problem, folks? It could go up 'til July 19th, that's the problem, lads!
I think, we should at least remain aware of the fact, that the market could, contrary to the expectations of the majotity, suddenly rise again, if anything even rise considerably. That's not meant to be a forecast, but a thought experiment. I would strongly suggest to keep this thought in mind and watch carefully, if a somewhat probable, moderate bounce does suddenly and on the quiet become an upside trend. Be careful, folks, be very careful.
My advice - worth what you paid for it.    ;-)  (/rant off)

Dr. Engali's picture

This is looking like the controlled demolition to get the Bernank's attention is turning into to a full fledged route.

ITrustMyGut's picture

this is beginning to look like the SOP of cartel banking ( standard CB method ) Expand like mad... then collapse money supply...

while I had once imagined they would print forever... trying to inflate away the blues of mountains of debt.. truth is.. they normally.. cyclically.. do this..


so..maybe ctrl-p really is done.. and here comes massive glabal contraction... SLAM.. where the end result will be they will own everyhting that they dont already...this time..including our very flesh and soul i 'spose..

should be fun to watch krug's head explose.... 

Chupacabra-322's picture

"they will own everyhting that they dont already...this time..including our very flesh and soul i 'spose.."

You're a little late on that one as the criminals already do. What do you think the birth certificates are all about?

Dr. Engali's picture

I have news for you....They already own you. You are debt serf number xxx-xx-xxx

Chupacabra-322's picture

Via the IMF. Game, set, match Slaves.

fonzannoon's picture

this is not bloodbath yet. If they want to see 2.50% we probably need to be down 500-600 points by lunch. That may not even get it done.

Bearwagon's picture

Well, as far as I can see it (without a doomborg-terminal or such expensive shit), Nikkei is down, Hang Seng is down, Shenzhen is down, DAX is down and so is EU-STOXX . . . .so, I can't think of any reason why the US markets shouldn't get into the green ...       ;-)

Dr_Lucid's picture

Reading up to this event over the last year or so, I never thought bonds would provide more excitement over stocks.  Really since when do interest rates move like that?

Bring it on.

GetZeeGold's picture



Bring it......what's a little suicide?

kahunabear's picture

Bloodbath? Come on, let's taken this thing down 1987 style! I want to see 1000 point drops and 1000 basis point rate jumps.

kahunabear's picture

Mr. Market, if you still exist, show Bernanke who is in charge! Time for the bond vigilantes to rise from the dead like zombies and take your bonds and sell them at any price.

eddiebe's picture

It's a good idea to let out some air. 

thunderchief's picture

They hammered gold and PM's so bad the past year there are no seller's left and only buyers, paper claim tickets excluded. Now they have to turn the knife on themselves.

f16hoser's picture

US Traders = Sheeple.

Buy Gold/Silver bullion and quit your fucking whining.

DowTheorist's picture

The primary trend of the market turned bearish last week according to the Dow Theory. Since 70% of Dow Theory signals are right, it is better to heed the message of the market....lower prices are a distinct possibility in the days and weeks ahead.



JethroBodien's picture

BTFD.  LOL.  This thing is going green before the markets close.   Me thinks someone out there is getting more desperate to keep this thing proped up.


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