Nikkei

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.

"The events of 1929 taught us that the absence of any rise in prices did not prove that no crisis was pending. 1937 has taught us that an abundant supply of gold and a cheap money policy do not prevent prices from falling."

"It’s difficult to see the fall stopping today," warned one Japanese equity strategist and rightly so as Japan's broad TOPIX idnex just entered a bear markets (down 20% from the August 2015 highs). With the Nikkei well below 17,000, Kuroda is due to speak at the Diet today as Japanese corporate bond risk surges to 20-month highs.

It is the “Core of the Core” that now concerns us the most. That is where Federal Reserve (and global central bank) policies have left their greatest mark. It is at the “Core of the Core” where momentous misperceptions and market mispricing have become deeply entrenched. It’s the “Core of the Core” that has attracted enormous amounts of “money” over recent years. It’s also here where I believe leverage has quietly been used most aggressively. Over recent years it became one massive Crowded Trade. Now the sophisticated players must contemplate beating the unsuspecting public to the exits.

UBS has warned that the seven-year cycle in equities is rolling over, we could see a sharp 30% correction in stocks and that as per the headline of their ‘Technical Outlook 2016?, it is time to “buy gold” ... "So if gold moves into a bubble, we would need to see a gold price of minimum $3,300 ..." 

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.

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.

After two months of sharp currency devaluation, the market was carefully watching last night's China trade data to see if the Yuan debasement had led to a positive trade outcome to the world's second largest economy, and as reported last night, it was not disappointed when China reported a December trade surplus of $60.09 billion from $54.1 billion in November, as a result of exports beating expectations and rising 2.3%, the first increase since June, while imports declined by just 4%, the smallest drop since 2014 despite China importing a record amount of oil, or 33.2 million tons, in December.

With China now "murdering" Yuan shorts, markets are content that the Chinese debacle seems to be contained if only for a while, and so the attention of both traders and algos alike has focused on oil, which earlier in the session dragged global equities lower as it dropped by 3%, just shy of the $30 level, a new 11 year low, before staging another dramatic rebound in minutes, wiping out all losses in the aftermath of what appears to have been a deadly suicide bomber terrorist explosion on a square the middle of Istanbul's historic district.

Some very troubling charts for the stock bulls to consider.

Chinese stocks are trading at the lows of the day after Overnight HIBOR rates (Hong Kong's interbank borrowing rate) exploded a stunning 939bps to a record high 13.4%. It is clear that banks are utterly desperate for liquidity and/or are extremely concerned about one another's counterparty risk. This has dragged HSCEI down 5% (to its lowest since Oct 2011).

It was an ominous beginning to what is poised to be a most tumultuous year. Market participants are quickly coming to appreciate that China does in fact matter. Few understand why. Most – from billionaires to fund managers to retail investors – will “Do Nothing.” This has worked just fine in the past – repeatedly. Not understanding and not doing anything will be detriments going forward.

The half-life of the latest "market supporting" intervention by the Chinese government: just about 12 hours.