US Equities Tumble As PBOC "Stamps Out" Short Yuan Speculators With "Murderous" Liquidity Squeeze

Tyler Durden's picture

China/Hong Kong Money Market stress remains extreme - O/N implied rates spike to 82%, 1w to 38%...

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."

This move sent CNH ripping higher (as shorts were forced to cover) all the way to parity with CNY...

 

But once that was complete, Offshore Yuan selling recommenced and that is dragging US equities lower...

 

As we explaiend earlier, it is now extremely expensive to short the Offshore Yuan - which is exactly what The PBOC appears to have wanted - “It is pure imagination that the Chinese yuan will act like a wild horse without any rein,” said Han, adding that short selling the yuan “will not succeed.”

 

 

As the gap between spot (squeeze) and forwards widens...

  • *CNH-CNY SPREAD NARROWS BELOW 100 PIPS FOR 1ST TIME SINCE NOV.

Reuters reports that the offshore yuan (CNH) implied overnight deposit rate has hit a record high at 82%. This is squeezing CNH shorts... big time.

As a result, the CNY-CNH spread has narrowed

 

  • *OFFSHORE YUAN STRENGTHENS 0.6% TO TRADE AT PARITY WITH ONSHORE

to patirty

Despite all the flatness and stability, Chinese stocks are extending losses... *SHANGHAI COMPOSITE FALLS 0.8% TO BELOW 3,000 LEVEL

 

 

As we detailed earlier, with Chinese equities tumbling in the face of PBOC's liquidity withdrawal (record spike in o/n HIBOR) and short-squeeze of CNH shorts (and carry traders), the sell-side is as confused as a CNBC anhcor at what is good and what is bad. UBS urges investors not to sell while JPM fears a structured-product-driven vicious cycle between EM and Chinese equities. Following a record-breaking surge in offshore Yuan against the USD (12 handles top to bottom) during the US session, selling has resumed into the fix. "Expectations the yuan will depreciate sharply should be seen as ridiculous and humorous," warned one Chinese official (who obviously did not get the memo of the last 3 weeks) as The PBOC injected CNY80bn and decided for the 3rd day in a row to hold the Yuan fix unchanged.

 

As we begin tonight's "trading", Chinese equities are deep in the red YTD:

  • *SHANGHAI MARGIN DEBT BALANCE DECLINES MOST IN FOUR MONTHS

 

"Expectations the yuan will depreciate sharply should be seen as ridiculous and humorous," warned one Chinese official (who obviously did not get the memo of the last 3 weeks)...

  • *PBOC TO INJECT 80B YUAN WITH 7-DAY REVERSE REPOS: TRADER
  • *CHINA KEEPS YUAN FIXING LITTLE CHANGED FOR THIRD DAY
  • *SHANGHAI MARGIN DEBT BALANCE DECLINES MOST IN FOUR MONTHS

 

Offshore Yuan is selling back down a little after an epic day of squeezing...

 

Meanwhile, away from the actual dynamics of tonight's early moves, mixed messages from a desperate sell-side tonight with UBS proclaiming:

  • INVESTORS SHOULDN'T SELL CHINESE STOCKS AT THESE LEVELS: UBS

And JPMorgan warning of a vicous cycle of selling between China and EM equities:

Events in Chinese equity markets feel uncomfortably close to the June-August sell-off.

 

The Shanghai and Shenzhen indices are down 15% and 20%, respectively, in the first six trading days of 2016. MSCI China, EM and World are down 11%, 9% and 7%, respectively. Onshore investors’ confidence in the local policy is weak. Shorting of H-share futures increased when A-share circuit breakers kicked in. If HSCEI moves below 8000 (spot 8505) then we approach structured product strikes leading to H-share futures selling. To add to the discomfort, the CNH overnight rate spiked to 23% as aggressive PBoC intervention results in a shortage of offshore renminbi. Finally, the market was disappointed that post the record decline in FX reserves, there was no RRR cut.

 

Simply the market is unsure on policy and is technically weak, driving EM toward our bear case end 2016 target of 720.

Wondering why we care about China? Here's one reason... US and Chinese stocks are extremely correlated since The Fed slowed and then stopped its money-printing... (and that correlation has increased since August and The Fed's September "fold")

 

The jawboning started early

  • *YUAN FALL TO STIMULATE CHINA'S EXPORTS: SECURITIES JOURNAL

which is entirely incorrect...

And then this:

  • *EXCHANGE RATE NOT DETERMINING FACTOR FOR EXPORTS: SEC. JOURNAL

Confused?

And finallyu there is this:

  • *PBOC'S ZHOU ATTENDS BIS MEETING

In other words - they are starting to coordinate!! Against The Speculators? Or The Fed?