It's all up to China tonight, and if early ETF indications are correct, today's US equity bloodbath is about to spill over right back into Chinese markets again, only this time without the benefit of circuit breakers making it an early close for local traders if they manage to push the market down 7% in 29 minutes.
Moments ago, on Bloomberg TV [8], Bill Gross said China's stock markets are likely to drop 5-6% on Friday: "Based upon the ETF in the United States, China is predicted to be down 5 percent or 6 percent…but China is an artificial market. All global markets are artificially based and to the extent that we have a catharsis, I think, depends upon central banks basically giving up in terms of what they do. I don't think that's going to happen."
Gross is referring to the following ETF:
[9]
Indeed, it appears that the US is far more bearish on what will happen in China tonight relative to the local futures market:
[10]
Incidentally, when asked whether the market turmoil will cause Chair Yellen to say the rate hike is done, Gross said: "I don't think she'll say that. They've been on this track of raising interest rates for so long that she's not going to come out with one or done. She may come out there -- someone may come out - Fischer perhaps - will come out and acknowledge the fact that global markets and that global financial conditions are an important consideration in terms of future policy. But I don't think they're going to divulge that they are not raising interest rates for times as Stan Fischer said a few days ago."
In other words, central banks to the rescue. Meanwhile...
Angry clients besiege Chinese brokerages
Back in China, which has had non-functioning markets on two of the past four days, should the market rout persist, the already angry local "traders", most of whom are undereducated and margined to the hilt, will likely snap.
According to Bloomberg, after yesterday's farce, angry clients besieged a brokerage as China's market crashed and was halted.
“We cannot go home. We are dealing with a flood of angry phone calls from clients complaining about the market plunge and the circuit-breaker system,” says Wei Wei, an analyst at Huaxi Securities Co. in Shanghai. Wei added that “we are also feeling at a loss and confused today as we didn’t quite figure out what was going on."
Wei also says that Huaxi management "has asked us to placate clients and guide them to cut holdings rationally if they do margin trading."
Sorry, but when clients have not only lost a year's worth of income in minutes but on top of that can't liquidate the remainder, no amount of placating will work.
Wei then explained what even the Chinese regulator realized after the first few days of experimenting with the new circuit breaker: "the circuit-breaker mechanism actually fuels declines and that goes against the regulator’s goal of stabilizing the market." It remains to be seen if removing the circuit breaker, a device by definition meant to stabilize markets, will lead to calmer markets. Maybe for the first few minutes, but then all bets are off.
"The new rule on major shareholders’ stock sales isn’t going to work to prevent the market from falling. It’s restricting sales and the CSRC cannot do things like banning them from selling forever. It’ll be a tough day again tomorrow."
The circuit breaker has been removed, but we feel it will be just as tough tomorrow, or rather, when China opens in a few hours.
In the US, traders are "too old for this"
It's not just Chinese traders. According to another Bloomberg report [11], US traders "can't afford to sleep" during what is becoming a nightly rout, starting just around 8:30pm Eastern.
With China’s stock market in disarray, American investors are finding out just how long their day can last -- before they even get to work.
"This morning when I rolled over in my bed at 4 a.m. to check the markets and saw what happened in China and in U.S. futures I thought, ‘Oh, here we go,’” said Howard Ward, who oversees $42.7 billion as the chief investment officer of growth equities at Gamco Investors Inc. "I’m getting too old for this."
It's a cowboy market
“If it’s somebody who really doesn’t know a lot about China, this is kind of scary. They say, ‘Oh my god, their market can drop 7 percent,’” said Nick Sargen, who helps manage $46.2 billion as chief economist and senior investment adviser for Fort Washington Investment Advisors Inc. “The reason I can be more calm about it is that I follow that market, I can say, listen it’s a cowboy market.”
Bloomberg concludes by saying that "night owls have been rewarded for at least a year as China’s influence moved action in U.S. stocks to hours when exchanges were closed. In 2015, shares in the S&P 500 swung more during off hours than their small-cap brethren for the first time in at least 15 years."
So far this year, the only privilege night owls have had is to watch as China loses control of its market on half the trading days so far.
* * *
So what happens tonight? Keep an eye on the Yuan fixing around 8 pm: if the USDCNY sees another substantial jump (i.e., Yuan decline) from last night's 5 year low rate of 6.5646, this could suggest further turbulence and as all self-fulfilling prophecies go, unleash another pukefest which not even the circuit breaker adjustment will fix. It will also mean that unless the Chinese plunge protection team aka the "National Team" throws everything it has at the stock market, the Shanghai Composite could fall first 5%, then 7%, and then not stop but simply keep falling until someone finally does step in.
In short: it will all be about a central bank rescue again.
But for now either go load up on coffee, or take a nap. It will be a long night.
