Glencore

The last time we looked at Chinese stocks, just a few hours ago, they were on pace to close back under 3000, following the latest collapse in trade, where in August exports dropped 5.5% (last -8.3%) while imports tumbled -13.8% in dollar terms (worse than the -8.1% prior). As the Reuters chart below shows, this was the 10th month in a row of declines and the worst stretch since the 2008 crisis, confirming China will need far more currency devaluation to stabilize the trade pain. And then Chinese authorities intervened with gusto, waiting until the start of the afternoon session, at which point a massive buying orgy ensued, and pushed the SHCOMP from down more than 2% to close at the day highs, up some 2.9%!

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Early this morning Glencore finally capitulated and admitted defeat not only on its expansionary phase (it was just last year Glencore had approached Rio Tinto to engage in a merger), but on its shareholder "friendliness", with a stunning annoucement that it would proceed in a $10 billion debt reduction, issuing $2.5 billion in equity in the form of a rights offering, sell $2 billion worth of assets (such as "proposed precious metals streaming transaction(s) and the minority participation of 3rd party strategic investors in certain of Glencore’s agriculture assets, including infrastructure"), cut working capital by $1.5 billion, cut capex and its loan book by a further $1-$1.8 billion... oh, and it would also scrap its final $1.6 billion dividend as well as next year's interim payout, saving a further $2.4 billion. All this because our "best way to trade China's blow up" was finally picking up steam.

Chinese stocks opened with a bang, and as we previously noted soared higher at the open after China's long 4-day holiday weekend, which however subsequently slowly (but very surely) fizzled, eating away at the hope that the 3-day drop in the Shanghai Composite would finally come to an end following comments from PBOC governor Zhou that the recent rout in Chinese stocks is almost over, and result in a relief rally in Europe and the US. Alas, all that was promptly swept away at the end of trading in China when the Shanghai Composite tumbled at close of trading to confirm just how unpleasant a "death cross" is coupled with loss of central bank control, and to push the Shanghai Composite down 2.5% for the day and 3.4% for the year.

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Update: even the rating agencies finally noticed - S&P: GLENCORE TO BBB/NEGATIVE FROM BBB/STABLE

Earlier today, Glencore stock plunged to a new all time low, after crashing nearly 20% in the past two days as investors with rose-colored glasses finally appreciate the dire reality facing the global miner. However, the best way to trade the beginning of the end for Glencore is not using stock at all.

We warned on Friday, after last week's China rout, that the market is getting ahead of itself with its expectation of a RRR-cut by China as large as 100 bps. "The risk is that there isn't one." We were spot on, because not only was there no RRR cut, but Chinese stocks plunged, with the composite tumbling as much a 9% at one point, the most since 1996 when it dropped 9.4% in a single session. The session, as profile overnight was brutal, with about 2000 stocks trading by the -10% limit down, and other markets not doing any better: CSI 300 -8.8%, ChiNext -8.1%, Shenzhen Composite -7.7%. This was the biggest Chinese rout since 2007.

The $64,000,000,000,000 question: what does the Fed now do? One attempt at an explanation taking into account last week's market plunge comes from Nomura, which provides a "2015 Scenario Analysis" in which it "breaks down various monetary policy (rate hike options) and rates market implications ahead."

"Short-term, markets seem intent on forcing either the Fed to pass in September, or the Chinese to launch a more comprehensive and credible policy package to boost growth expectations. Alternatively, a credit event in commodities (note CDS is widening sharply for resources companies – front page chart) may be necessary to cause policy-makers to panic. Markets stop panicking when central banks start panicking."

"Arguably the only reason to be bullish risk assets right now is there are no reasons to be bullish."

• Crude prices fall towards $40 on global glut (Reuters)
• China Central Bank Injects Most Funds Since February as Money Rates Increase (BBG)
• Divided Fed Puts Yellen on Hot Seat (Hilsenrath)
• So Long September: Bond Traders Defer Their Date With the Fed (BBG)
• More Foods Boast Non-GMO Labels—Even Those Without GMO Varieties (WSJ)
• UN to let Iran inspect alleged nuke work site (AP)
• IAEA says access to Iran's Parchin military site meets demands (Reuters)
• Time to End Quarterly Reports, Law Firm Says (WSJ)

The PBOC set the Yuan fix 0.08% stronger - the biggest 'strengthening' in 2 months, which is interesting because The IMF's confirmation of a delay to Yuan inclusion in the SDR basket to Oct 2016 (pending a year-end decision) asked for more flexibility. For the 3rd day in a row, The PBOC injected massive liquidity (120bn today, 110bn yesterday, 120bn Monday). Shanghai margin debt declined for a 2nd day in a row and Chinese stocks look set to open weaker.

But Not There Yet...

One month ago we asked: "Which will be first: Trafigura, Mercuria or Glencore." Today we got our answer.

After trading at what we postulated was the rough floor for the CDS at 150 bps for over a year, in the past month Glencore CDS have exploded higher, and at last check was trading 315 bps wide, about 150 wider from the March 2014 levels with the likelihood of a major gap wider when the rating agencies downgrade the company from investment grade to junk, which in turn would trigger an unknown amount of cascading collateral calls and an accelerated liquidity depletion, which would then further hammer Glencore's bonds, and as a result, send its default risk, and CDS, surging.