Yuan

With the US closed today for Martin Luther King Holiday, global risk tone has once again been set entirely by oil, which opened sharply lower at fresh 12 year lows on fears of an Iran oil glut, but has steadily rebounded on the latest OPEC comments, and at last check both WTI and Brent were unchanged trading in the low $29's on muted volume. With Asian markets mixed, European shares swung between gains and losses, while the yen weakened as China stepped up efforts to curb foreign speculation against its currency. Crude oil rose from a 12-year low after the Organization of Petroleum Exporting Countries forecast a decline in supplies from rival producers.

With Hong Kong Dollar spot little changed (but pressing the weaker end of its peg band) and 12-month forwards suggesting notable weakness/depegging to come, it appears that the Hong Kong interbank lending debacle is far from over. While overnight money appears stable, 1-week Yuan HIBOR is up 370bps at 11.90%, and 1-month and 3-Month HKD HIBOR just snapped higher ( to Jan 2013 highs and July 2010 highs respectively). It appears comments from Hong Kong Monetray Authority's Norman Chan that it's just a matter of time before outflow of funds lead to the local currency hitting the low end of the peg sparked heavy medium-term demand for liquidity. Offshore Yuan is crepping back weaker (as is crude) after an early bounce but NKY ended below 17,000 - for the first time since September.

On the heels of new reserve ratio regulations and the biggest strengthening in the Yuan fix in 4 weeks, offshore Yuan has strengthened notably (despite Chinese default/devaluation risk surging in the CDS markets). Chinese stocks are weaker in the early going but corporate bond yields continue to slide to new record lows as the "last bubble standing" stands ignorant of the risks around it.

"Assuming selling in accordance to the average allocation of FX Reserve Managers and SWF across asset classes, we estimate that the sales of bonds by oil producing countries will increase from -$45bn in 2015 to -$110bn in 2016 and that the sales of public equities will increase from -$10bn in 2015 to -$75bn in 2016."

It would be hard for a year to start any worse than 2016 has... "Prices are oversold and sentiment hasn’t been this despondent in a long time (even Aug/Sept wasn’t this palpably negative) but any bounce will not be particularly impressive and in a lot of ways that is the main problem as the upside just isn’t compelling enough to make a major stand...as Western central banks attempted to mollify sentiment with dovish rhetoric but to no avail."

"Why has public opinion changed so much? How did our party misread public opinion? We failed. The Nationalist Party lost the elections. We didn't work hard enough."

There’s more than a whiff of 2008 in the air. The sources of systemic financial sector risk are different this time (they always are), but China and the global industrial/commodity complex are even larger tectonic plates than the US housing market, and their shifts are no less destructive. There’s also more than a whiff of 1938 in the air, as we have a Fed that is apparently hell-bent on raising rates even as a Category 5 deflationary hurricane heads our way, even as the yield curve continues to flatten.

In the latest Chinese domestic financing report released by the PBOC last night, there were two divergent themes: on one hand bank loans grew far less than the expected 700Bn yuan; on the other hand total social financing soared to 1.82 trillion yuan, smashing forecasts of a 1.15 trillion increase, and the highest since June. As noted last night, this may have been the catalyst that spooked the markets, because as Bloomberg confirms, "the data shows companies are turning to alternative sources for credit given banks’ reluctance to lend."

Yesterday, when looking at the market's "Bullard 2.0" moment, which in many ways was a carbon copy of the market's response to Bullard's "QE4" comments from October 17, 2014 until just a few minutes before the market close when suddenly selling pressure appeared, we said that either the S&P would soar - as it did in 2014 - hitting all time highs just a few months later, or the "Fed is now shooting VWAP blanks." Judging by what has happened since, in what may come as a very unpleasant surprise to the "the market is very oversold" bulls, it appears to have been the latter.

It appears the world is ganging up on The Fed as following China's recent clear and present threat should the USD strengthen, BoJ's Kuroda warned that further QQE might threaten the bank's finances - implicitly demanding moar from Yellen because he knows he's out of bullets. Add to that the surge in China credit which merely extends the life of already zombified firms, thus spreading more deflationary stress to the world and stocks from China (SHCOMP -3%), Japan (NKY -500) to US (Dow -280 points from Bullard Bounce highs) are tumbling.

It's been a roller coaster year for China's legions of semi-literate day traders who have seen the heights of feast and the depths of famine with Chinese equities over the past 12 months. Now, in the wake of more volatility, many Chinese retail investors are throwing in the towel. 

Having made its warning to the Fed loud and clear ("if you hike or otherwise push the USD any higher, we will crush your markets by devaluing the Yuan against everyone but mostly the USD"), the PBOC continued the fragile ceasefure between the world's two most powerful central banks, when moments ago it kept the onshore Yuan virtually unchaged, by weakening today's fixing by 0.03% to 6.5637. However, as can be seen on the chart below, this has barely even registered.

We’re experiencing wealth-destruction due to asset-price dynamics alone. The negative moves will stop only when excess leverage is trimmed and not just when prices return to “fair value.”

European shares tumbled, wiping out gains from a two-day rally, Asian stocks slid and the cost of insuring corporate debt rose as investor concern over global growth prospects resurfaced. U.S. equity-index futures pared gains of as much as 0.9 percent. Government bonds rose, with yields falling to records in Japan and China amid anxiety over the world economy. U.S. crude prices stabilized after dropping below $30 a barrel on Tuesday to touch the lowest since 2003 as Iran moved closer to boosting exports.

Chinese stocks are down over 20% from Dec highs at 2-year lows, Offshore Yuan is tumbling once again, and Hong Kong Dollar is under severe pressure (with significant de-pegging risk once again).