Stocks Resume Rout After Massive Chinese Intervention Fails To Lift Shanghai, Calm Traders

After yesterday's historic -6.9% rout in the Shanghai Composite, which saw the first new marketwide circuit breaker trading halt applied to Chinese stocks (on its first day of operation), many were wondering if the Chinese government would intervene in both the once again imploding stock market, as well as China's plunging and rapidly devaluing currency. And, after the SHCOMP opened down -3%, the government did not disappoint and promptly intervened in both the Yuan as well as the stock market, however with very mixed results which global stocks took a sign that the Chinese "national team" is no longer focused solely on stocks, and have resumed selling for a second consecutive day. 

According to Bloomberg, China moved to support its sinking stock market as state-controlled funds bought equities and the securities regulator signaled a selling ban on major investors will remain beyond this week’s expiration date, according to people familiar with the matter. Government funds purchased local stocks on Tuesday, said the people, who asked not to be identified, or arrested, or executed, because the buying wasn’t publicly disclosed - just like when the Federal Reserve intervenes in the US stock market.

Additionally, the China Securities Regulatory Commission asked bourses verbally to tell listed companies that the six-month sales ban on major stockholders will remain valid beyond Jan. 8. As a reminder, rumors that big insiders would be allowed to dump stock as soon as the end of this week is what started the initial selloff yesterday which accelerated the triggering of the circuit breaker.

“The market has got some help from state funds and that will support shares in the short term,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co. “However, in the long run, the market will need its own strength to hold up. It can’t always rely on the national team.” As a reminder, the national team is how China calls its own plunge protection team.

Finally, in an attempt to stabilize liquidity, the nation's central bank also pumped 130 billion yuan ($19.9 billion) into the financial system after money market rates jumped. However, this injection has in turn spooked some that the PBOC will no longer provide long-term easing via such instruments as MLFs, and force banks to rely too much on short-term sources of funding.

And yet, despite all this, not only did the Shanghai Composite tumble into the close, reverting back to its -3% opening level, but a last minute surge into the close did not even manage to push the Composite into the green, with the SHCOMP closing -0.3%.


China's difficulty (or unwillingness) to achieve substantially confidence-boosting results, positive results is also why after being boosted early in the session, both US equity futures, global stocks and the all important USDJPY carry pair, failed to sustain gains and have once again dropped in overnight trading: U.S. stock-index futures pointed to more losses after equities started the year with the worst rout in 15 years. S&P 500 Index E-mini contracts expiring in March fell 0.6% with the current market snapshot looking as follows:

  • S&P 500 futures down 0.6% to 1996
  • Stoxx 600 down 0.3% to 355
  • FTSE 100 down less than 0.1% to 6090
  • DAX down 0.9% to 10193
  • German 10Yr yield down 1bp to 0.56%
  • Italian 10Yr yield down 3bps to 1.52%
  • Spanish 10Yr yield down 3bps to 1.69%
  • MSCI Asia Pacific down 0.4% to 128
  • Nikkei 225 down 0.4% to 18374
  • Hang Seng down 0.7% to 21185
  • Shanghai Composite down 0.6% to 3277
  • US 10-yr yield down 1bp to 2.23%
  • Dollar Index up 0.31% to 99.18
  • WTI Crude futures down 0.3% to $36.64
  • Brent Futures down 0.7% to $36.95
  • Gold spot up 0.3% to $1,078
  • Silver spot up 0.9% to $14.00

“It’s a really messy start to the year -- everyone is really on edge,” said William Hobbs, head of investment strategy at Barclays Plc’s wealth-management unit in London. “Not much is expected of the world in terms of growth, risk appetite is biased to the downside and weak data from China to the U.S. hasn’t helped at all. Plenty of people out there believe that the next global recession is imminent.”

Looking at regional markets, Asian stocks saw choppy trade throughout the session as they initially shrugged off opening losses to trade mostly higher after the PBoC upped its liquidity injection, while the CSRC was said to be considering limiting share sales by major stakeholders and there was also speculation of intervention by China state funds to support equities. This initially lifted the region's bourses, before markets reversed course again in a resumption of the risk averse theme so far in 2016 and saw the Nikkei 225 (-0.4%) extend on its worst start to the year since 2008. Shanghai Comp (-0.30%) fluctuated between gains and losses, having earlier pared all its 3% opening declines after the PBoC announced a CNY 130bIn injection via 7-day reverse repos, which
was its largest open market operation since September, while the ASX 200 (-1.0%) remains negative as commodity linked names suffer. 10-year JGB's were relatively flat and unreactive to a somewhat mixed 10yr auction where the bid-to-cover was lower and the tail widened from the prior month's auction, as the results were still much better than the 12-month average.

Top Asian News:

  • PBOC Injects Most Cash Since September in Open-Market Operations: China central bank injects 130b yuan using reverse repos
  • China Retools Bank Reserve Ratio, Casting Doubt on RRR Cuts: Central bank planning new “Macro Prudential Assessment” system
  • Dick Smith Crumples Just 2 Years After $384 Million Listing: Australian retailer fails to obtain support from bankers
  • Kuroda’s Oil Rebound Proves Elusive in Boost for Japanese Bonds: Saudi-Iran tension doesn’t alter Barclays’s inflation outlook

Likewise in Europe, investor optimism in Europe proved short-lived as shares in the region erased an advance of more than 1 percent, and failed to hold on to early strength trade relatively in negative territory, with the tepid start to 2016 continuing. The Stoxx Europe 600 Index fell 0.3 percent after slumping 2.5 percent on the previous day. Carmakers and chemical companies posted the worst declines, while travel and leisure stocks rose. Germany’s DAX Index fell 0.7 percent after its slide Monday that was the biggest since a summer rout triggered by China’s devaluation of the yuan.

Top European News:

  • Buyout Firm EQT Said to Bid for Swiss Travel Company Kuoni: Discussions with possible bidders at preliminary stage
  • Next Holiday Sales Miss Sends Distress Signal Across U.K. Retail: Slowdown at online unit compounds impact of mild weather
  • Nevsky Capital to Shutter $1.5 Billion Hedge Fund After 15 Years: Nevsky expects to liquidate portfolio, move into cash by end of January

The risk off sentiment has continued to bolster fixed income markets, with Bunds advancing throughout the morning amid touted real money buying to break above the 159.0 level. Also of note, the Eonia fix remains near Christmas Eve's record low, while ECB excess liquidity reached its highest level since November 2012.

In FX, the yen was the best performing currency, while the euro dropped as data showed euro-area inflation was weaker than economists predicted in December, when the European Central Bank stepped up its stimulus program. The 19-member common currency declined 0.5 percent to $1.0778, falling again most major peers.

Developing-market currencies were mixed, with the Polish zloty, Hungarian forint and Turkish lira slipping at least 0.6 percent, while Indonesia’s rupiah and the Philippine peso gained at least 0.3 percent.

In commodities, oil prices remained flat throughout the European session, with no new fundamental news after the market shrugged off the increase in tensions between Iran and Saudi Arabia.

Gold advanced 0.4 percent to $1,078.34 an ounce, rising for a second day. Copper rose 1.1 percent to $4,661 a metric ton on the London Metal Exchange, while nickel, aluminum, and zinc also advanced as industrial metals pared the biggest decline since September as the PBoC announced injection of CNY 130bIn via 7-Day reverse repos, after yesterday's sell-off in metals.

West Texas Intermediate crude for February delivery was little changed at $36.72 a barrel on the New York Mercantile Exchange, after falling 0.8 percent Monday. U.S. crude inventories are forecast to keep supplies more than 130 million barrels above the five-year seasonal average, according to a Bloomberg survey before government data Wednesday.

A measure of wheat, corn and soybean prices rose after slumping to a nine-year low Monday on concern beneficial weather in Latin America will exacerbate global supply gluts. The Bloomberg Grains Subindex rose 0.7 percent after slumping to the lowest since September 2006.

Today's US economic calendar is rather empty, with just the ISM New York , API Crude Oil Inventories, and December auto sales on Deck.

Top Global News

  • China Said to Intervene in Stocks After $590b Selloff: State funds buy after CSI 300 index tumbled 7% on Monday, CSRC signals 6-month selling ban on major holders to stay. China Open to Circuit-Breaker Tweaks as Analysts Highlight Flaws: Regulator says it will “gain experience and make adjustment”
  • Fairchild Said Planning to Open Door for Talks With China Suitor: Plans to say revised proposal from group led by China Resources Holdings, Hua Capital likely to lead to superior offer
  • VW’s Top Executives Plan U.S. Visit as Diesel Woes Mount: Penalties in U.S. suit could reach as much as $80b
  • Orange, Bouygues Confirm Preliminary Talks Over Telecom Unit: Companies says talks are preliminary and may still fail
  • Oil Shrugs as Glut Blunts Shock From Deeper Saudi-Iran Clash: Oversupply trumps escalating diplomatic conflict
  • China’s Wanda in Talks to Buy Legendary Stake, Reuters Says: Deal values American filmmaker at up to $4b
  • Gene-Editing Drugmaker Backed by Google, Gates Files for IPO: Editas Medicine to use proceeds for blindness, cancer studies
  • Legg Mason Said to Be in Exclusive Talks to Buy Clarion Partners: Deal said to value real estate investment manager at $850m
  • Manhattan Apartment Prices Top Pre-Crisis Record on Luxury Deals: Home prices in borough increase to median of $1.15m
  • ArcelorMittal Considering Scaling Back U.S. Operations: AMM: Co. cites underutilised hot strip mills as possible consolidation target

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities failed to hold on to early strength and trade in negative territory, with the risk-off sentiment continuing to bolster fixed income markets
  • Early Tuesday FX trade has been largely EUR based, with decent EUR/JPY selling reported
  • Looking ahead, highlights include ISM New York and API Crude Oil Inventories
  • Treasuries gain in early trading as global stocks declined for a second day after China’s efforts to prop up its stock market failed to quell investor misgivings over the strength of the global economy.
    PBOC injected the most cash since September into the financial system to keep a lid on borrowing costs and was also said to intervene in FX markets to prevent excessive volatility
  • The required reserve ratio for commercial banks will increasingly be used instead as a lever for enforcing financial stability, according to a PBOC announcement on Dec. 29 describing a new Macro Prudential Assessment system
  • Euro-area consumer prices rose an annual 0.2%, less than expected; “It’s a major disappointment,” Rabobank FX strategist Jane Foley said on Bloomberg TV
  • U.K.’s Cameron will allow ministers in his cabinet to decide for themselves whether to campaign for Britain to stay in or leave the EU in a referendum expected later this year
  • The alliance between the U.S. and Saudi Arabia -- an almost century-old friendship at the heart of American policy in the region -- is coming under growing strain as the Sunni- led kingdom engages in an escalating Cold War with Shiite Iran
  • Spain’s acting prime minister, Mariano Rajoy, called for a three-way coalition including the main opposition Socialists to provide the stability he says is needed to safeguard the economic recovery
  • Companies like J. Crew Group Inc. and 99 Cents Only Stores are struggling under debt they took on in LBOs; their bond prices have plummeted -- in some cases to as little as 25 cents on the dollar -- as investors brace for possible defaults
  • No IG or HY deals priced yesterday. BofAML Corporate Master Index OAS holds at +173, YTD range 180/129. High Yield Master II OAS widens 15bp to +710; YTD range 733/438
  • Sovereign bond yields lower. Asian and European stocks lower, U.S. equity-index futures decline. Crude oil lower, gold and copper higher

US Event Calendar

  • 9:45am: ISM New York, Dec. (prior 60.7)
  • TBA: Wards Domestic Vehicle Sales, Dec., est. 14.2m (prior 13.99m)
  • Wards Total Vehicle Sales, Dec., est. 18m (prior 18.05m)

DB's Jim Reid completes the overnight wrap

So much for a peaceful start to the New Year then. Risk assets suffered a torrid opening day of 2016 yesterday with much of the blame being attributed to the huge falls in the overnight session in China. Having been down around 4% as we went to print yesterday, Chinese equity markets continued to sell-off into the close. The Shanghai Comp, CSI 300 and Shenzhen closed with losses of -6.86%, -7.02% and -8.22% respectively by the close of play in a day reminiscent of the huge falls seen in the August sell-off, the move lower for the Shenzhen in particular being the largest in nearly 8 years. That soft manufacturing data for China was seen a starting point for the blame, although a couple of other factors, which we’ll touch on shortly, were seen as perhaps having a greater impact. The geopolitical concerns between Saudi Arabia and Iran did little to help temper the negative tone as did some much softer than expected manufacturing data out of the US. The end result was some hefty falls on both sides of the pond too. The Stoxx 600 closed down -2.50% - its worst start to a year ever - while the DAX was down -4.28% for its worst fall since late August. The S&P 500 (-1.53%) managed to recover about a percent into the close but still suffered its worst start to a year since 2001 and the sixth-worst ever.

It’s straight to overnight session in Asia then where having initially taken another steep leg lower at the open, bourses in China have settled down into the midday break as headlines break around possible support through state intervention. The Shanghai Comp is currently +0.41% although that’s having opened over 3% down before swiftly reversing course. The CSI 300 is +0.79% although the Shenzhen (-0.53%) has failed to break into positive territory this morning. It’s a bit mixed in the rest of Asia. The Hang Seng is currently flat, while there’s gains for the Nikkei (+0.12%) and Kospi (+0.48%) although the ASX (-1.57%) has extended its poor start to the year. Oil markets are around half a percent higher, while credit indices in Asia are generally a basis point tighter. US equity futures are pointing towards a slightly more positive start.

In a note published yesterday, our China equity strategists highlighted that several concerns were to blame for the sell-off this time 24 hours ago. As well as the soft manufacturing data, the sharp RMB depreciation (fix once again set lower), mounting investor concerns on A-share supply increase ahead of the expiring sell restriction on major shareholders (this Thursday) and perhaps most importantly the newly enacted circuit breaker which may have exacerbated market concerns on a dry-up in liquidity were all given as reasons. Despite the latter being designed to lower volatility, our colleagues highlight that it took more than two trading hours for the CSI 300 to hit the -5% threshold yesterday but just 15 minutes to hit -7% as investors rushed to sell indiscriminately to raise cash after the 15 minutes suspension and so instead amplifying volatility. In their view they wouldn’t be surprised to see the A-share circuit breaker fine-tuned in coming months, something acknowledged by the China Securities Regulator this morning.

Back to markets elsewhere yesterday. The distinctly risk-off start to the year saw a decent bid fuel across core Government bond markets. 10y Treasury yields finished the session down 2.7bps at 2.243% although did temper a move lower of as much 7bps mid-way through the session. 10y Bund yields were down over 6bps and are sitting around 0.565%. Much like the equity moves, credit markets were hard hit also with Crossover nearly 19bps wider and CDX IG over 2bps wider in the US. Gold rallied +1.23% while Oil finished -0.76% lower and below $37, although in fairness this masked some larger intraday moves related to those tensions in the Middle East.

It was the US data which also stole some of limelight after a disappointing December ISM manufacturing print (48.2 vs. 49.0 expected). The reading was down 0.4pts from November and in turn registered for the first time since the end of the last recession its second consecutive sub-50 reading. The number was also the lowest since June 2009 and raises concerns of contraction in the factory sector. Of interest, the employment component fell a significant 3.2pts to 48.1 which got people talking of potential downside risks to this Friday’s payrolls. The December non-manufacturing ISM survey released tomorrow now takes on more significance post the data, particularly given the large divergence between the manufacturing and non-manufacturing data at present (7.3pts in November). In fact, our US economists highlight that aside from now there has been a substantial spread between the two series on only two previous occasions. Both times (in 2000/2001 and 2005) the spread closed because the non-manufacturing ISM ultimately followed the downward trend already in place in the manufacturing ISM. So one to keep an eye on.

Back to the data yesterday, US construction spending was also soft at -0.4% mom in November (vs. +0.6% expected). Meanwhile the final December manufacturing PMI was nudged down one-tenth to 51.2. The Atlanta Fed revised down their Q4 GDP forecast significantly post yesterday’s data to 0.7% for the quarter, from 1.2% at the end of December and as much as 2% mid-way through the month.

While the manufacturing data disappointed for the most part yesterday, there was better news to be had in Europe where the final Euro area manufacturing PMI was revised up one-tenth to 53.2. This was supported by an upward revision to Germany (+0.2pts to 53.0) while Italy also saw a decent rise (+0.7pts to 55.6). Readings for France (-0.2pts to 51.4) and the UK (-0.6pts to 51.9) were a tad more disappointing, although better than expected mortgage approvals and lending in the latter helped sentiment there.

Meanwhile, there was some disappointment in the preliminary German CPI reading for December which printed at -0.1% mom at the headline and well below expectations for +0.2%. That saw the YoY rate taken down one-tenth to +0.3% (vs. +0.6% expected).
There was some Fedspeak for us to digest yesterday too. Cleveland Fed President Mester downplayed the big drop in Chinese equity markets, instead saying that ‘we’ve built in a weakening path for China’ and that ‘I don’t see that as a significant risk to the forecast’ for the US economy. San Francisco President Williams was also seemingly unfazed by the China moves, saying that ‘right now at least this isn’t a big concern for me’ and instead choosing to focus on the strong fundamentals for the US economy. Williams also went on to say in an interview with CNBC that for 2016, ‘something in that three to five rate hike range makes sense at least at this time’ – this of course higher than the current marking pricing for about two 25bp hikes.

Turning over to the day ahead now the main focus in the European session will be the December CPI print for the Euro area where we’ll get the advance core reading (expectations for +1.0% yoy) and an estimate for the headline print (+0.3% yoy expected). Italian CPI is also due while over in Germany we’ll get the December unemployment data. It’s quieter in the US this afternoon with just the latest regional manufacturing print in the form of the ISM NY, while later this evening the December vehicle sales numbers are due out.