Crude Oil

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After a 5 day tumbling streak, which saw Chinese stock plunge well over 20% and 17% in just the first three days of this week, overnight the Shanghai Composite was hanging by a thread (and threat) until the last hour of trading. In fact, this is what the SHCOMP looked like until the very end: Up 2.6%, up 1.2%, up 2.8%, up 0.6%, up 2%... down 0.2%. And then the cavalry came in: "Heavyweight stocks like banks and insurance companies helped pull up the index, and it’s possibly China Securities Finance entering the market again to shore up stocks," Central China Sec. strategist Zhang Gang told Bloomberg by phone. Net result: the Composite, having been red just shortly before the close, soared higher by 156 points or 5.4%, showing the US stock market just how it's down.

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Lost in all the stock market focus is the renewed disaster being signaled across credit markets, “inflation” expectations in particular. Here oil prices and the “dollar’s” darkening intersect with credit and broad financial settings. Quietly, market-based measures of the anticipated future “inflation” path have crashed. It can no longer be transitory, which extrapolates nowhere good for monetary policy, orthodox economics and the actual global economy. The theme for several years now has been that “they don’t know what they are doing” and once more we find that proven by “unexpected” events that were perfectly predictable outside the orthodox bubble.

It seemed like finally China's relentless and increasingly futile attempts to have a green stock close would work: interest rate cuts, liquidity injections, direct stock interventions, even threats on the Prime Minister's head, and just to make certain moments before the close news very deliberately broke that government funds are buying large financial stocks, especially state-owned banks, to support the index, in the latest clear signs of government support, the Shanghai Composite seemed on pace to end an unprecedented series of consecutive tumbles which have dragged the composite down nearly 1000 points, or 25% in one week, and then... red close, with the SHCOMP down 1.3% to 2927, and a stunned China watching in horror as the central bank and government lose control, and everything they throws at the biggest market bubble of 2015 does absolutely nothing.

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Every Federal Reserve Chair since 1979 has faced a notable challenge in the first 12-20 months of their tenure – something akin to capital markets “Bullies” hazing the new kid at school. Paul Volcker had the 1979-1980 Iranian oil shock/recession, Alan Greenspan the 1987 Stock Market Crash, and Ben Bernanke the 2007 Financial Crisis. Their responses shaped market perceptions about Federal Reserve priorities and set the stage for the remainder of their tenures, from Inflation-Fighting Volcker to Save-the-World Bernanke. Now, it is Chair Yellen’s turn...

Markets are writing a new storyline...

"... others took us to task a great deal more disconcertingly, calling upon us to close our business; to take up another vocation; to stop making “calls” and as one “pundit” rather comically suggested we should go have sexual relations with our self."

The PBOC cut itself was not surprising, considering the PBOC now has to juggle and micromanage every aspect of the economy, from its sliding currency, to the bursting stock bubble, to record capital outflow, to soaring real interest rates, to the slowing economy. In fact, bulls around the globe will welcome the latest central bank bailout. Which also happens to be the worst aspect of today's intervention, because one can once again toss all the talk that China would finally stop intervening in asset pricing, with today's decision merely perpetuating the market's reliance on central banks. As a reference, this was the second time China cut both RRR and interest rates in 2 months: the last time it did so was during the depths of the financial crisis.

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And News That Matters

"We should all be in “survival mode” today; there is no reason to take action of any sort other than to raise liquidity where  necessary in order to survive the present chaotic situation. Survival is all that matters. All else is secondary, even if that means surviving with far less liquidity than one had only mid-week last week. This is time for retaining what liquidity we can muster; this is not a time for courage. Get smaller; get liquid and get safe. This is getting ugly and we can only hope it does not get worse."

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.