Crude Oil

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.

Moments ago, the $40 support level for oil finally snapped and with its so did Gartman's oil stop loss level, which means Gartman is now stopped out. Normally this would mean going long, however in this case China has yet to open and following the disappointment of no RRR-cut, tonight's commodity carnage may just be beginning.

Stocks aren’t quite as immune to financial disruption in the middle of 2015 as they had been previously. We are starting to see the legend of QE fade into nothing more than memory, exposing all these “markets” to the very real dangers of the fundamental economy, globally, that never joined the hype. Does that mean QE4,5, or 6? It might, but at this point is there any illusion left?

Over the weeks, months, and years ahead we’ll begin to understand more about the fallout from the death of the petrodollar and nowhere is it likely to be more apparent than in Saudi Arabia where widening fiscal and current account deficits have forced the Saudis to tap the bond market to mitigate the FX drawdown that's fueling speculation about the viability of the dollar peg. As Bloomberg reports, the current situation mirrors a "very scary moment" in Saudi Arabia’s history.

Steep losses in the dollar, stocks and commodities, for sure, but does it really signal a systemic crisis? 

Shockwaves from China’s devaluation have conspired with sluggish global demand and an attendant commodities slump to wreak havoc on developing market currencies the world over. On the heels of Kazakhstan's dramatic move to float the tenge, here's which currencies are next in line to tumble.

"SPOT GOLD: Runnin “Smack” Into Long Term Resistance: We turned supportive of gold several weeks ago rather publically [ZH: sic], but now gold in US dollar terms is running into what we fear shall be formidable resistance… with the margin clerks around the world looking to sell gold to raise liquidity as stocks come under very real pressure." - Dennis Gartman

Perhaps the biggest surprise about the overnight Chinese stock rout is which followed the lowest manufacturing PMI since March 2009, is that it happened despite repeat sellside pleas for a PBOC RRR cut as soon as this weekend: usually that alone would have been sufficient to push the market back into the green, and it almost worked when in the afternoon session stocks rebounded after dropping as much as 4.7% below the "hard" floor of 3500, but then a second bout of selling just before the close took Chinese stocks right back to the lows with the Shanghai Composite closing at 3,507, down 4.3% on the day, having wiped out the entire 18% rebound from July 8 when the PBOC first threatened both sellers and shorters with arrest.

News That Matters...

It is unclear what precipitated it (some blamed China concerns, fears of rate hikes, commodity weakness, technical picture deterioration although  it's all just goalseeking guesswork) but overnight S&P futures followed yesterday's unexpected slide following what were explicitly dovish Fed minutes, and took another sharp leg lower down by almost 20 points, set to open below the 200 DMA again, as the dazed and confused investing world reacts to what both the Treasury and Oil market signal is a deflationary deluge. Indeed, oil is about to trade under $40 while the 10Y Treasury was last seen trading at 2.07%. Incidentally, the last time oil was here in March of 2009, the Fed was about to unleash QE 1. This time, so called experts are debating if the Fed will hike rates in one month or three.

But Not There Yet...

Seconds ago, someone accidentally (we hope) pulled a Janet Yellen as the following just came across the wires

FOMC MINUTES: MEMB 'GENERALLY AGREED' MORE INFO NEEDED TO HIKE
FOMC MINUTES: NO TIP TOWARDS SEPT LIFTOFF, DOESN'T RULE IT OUT

But the bottom line is that the Fed just admitted things are going from bad to worse: "The risks to the forecast for real GDP and inflation were seen as tilted to the downside." The question now is what comes first: QE4 or the first rate hike in nearly a decade.

With China's currency devaluation having shifted to the backburner if only for the time being, all attention was once again on the Chinese stock market roller coaster, which did not disappoint: starting off with yesterday's dramatic 6.2% plunge, the Shanghai Composite crashed in early trading, plunging as much as 5% in early trading and bringing the two-day drop to a correction-inducing 11%, and just 51.2 points away from the July 8 low (when China unleashed the biggest ad hoc market bailout in capital markets history) . And then the cavalry came in, and virtually the entire afternoon session was one big BTFD orgy, leading to a 1.2% gain in the Shanghai Composite closing price, while Shenzhen and ChiNext closed up 2.2% and 2.7%, respectively.

The central bank has injected new capital into the China Development Bank (CDB), which provides medium and long term financing to major national projects, in a bid to reinforce its capital adequacy.

Just hours after the PBOC announced a modestly "revalued" fixing in the CNY, which curiously led to weaker trading in the onshore Yuan for most of the day before a forceful last minute intervention by the central bank pushed it back down to 6.39 it was the local stock market spinning plate - which had been relatively stable during the entire FX devaluation process - that China lost control over, and after 7 days of margin debt increases the Shanghai Composite plunged by 6.2% in late trade, tumbling 245 points to 3748, just 240 points above its recent trough on July 8, a closing level some 27% off its June peak.