(courtesy zero hedge/Jim Reid Deutsche bank)

Courtesy of central planning, virtually every single capital market has become an illiquid penny stock, with wild swings from one extreme to the other, the latest example of this being the Shanghai Composite, which after soaring 10% in the past ten days, crashed 6.5% overnight tumbling 321 points to 4620 after it briefly rose just shy of 5000. This was the biggest drop since January 19 when the Composite dropped 7.7% only to blast higher ever since. Putting the “plunge” in perspective, now the SHCOMP is back to levels not seen in… one week.

What caused this long overdue plunge? According to the WSJ, three factors were in play: China’s sovereign-wealth fund said earlier this week it had sold stakes in two state-owned banks; more brokerages are tightening margin trading; and the central bank soaked up cash from commercial banks, a sign that the government is trying to contain excess liquidity in the financial market.

In other words, more sellers than buyers, but at least the soundbites were great: “The China market is basically trading like a yo-yo,” said Steve Wang, research director at Reorient Financial. “It is retail driven, people just follow the trend.”

So, fundamentals are at play you say?  More soundbites:

Thursday’s drop in Shanghai could shift the market from a “crazy bull into a slow bull,” said Li Shaojun, analyst at Minsheng Securities Co. Ltd. Most major sectors were down more than 4%, noted Gerry Alfonso, director of trading at brokerage Shenwan Hongyuan Securities.

The reality is that while one can blame retail investors for day to day swings, it is all centrally-planned:

China’s securities watchdog hasn’t announced a new clampdown on margin trading, but several securities firms have said they are changing requirements for the practice. Changjiang Securities tightened its margin financing rules Wednesday, after GF Securities and Haitong Securities said earlier in the week that they will raise the amount of collateral investors must put up to get loans. In late April, Shenwan Hongyuan Securities and Donghai Securities made similar moves.

 

“With the total margin financing volume approaching two trillion yuan ($322 billion), institutional investors [are becoming] more cautious over any potential market bust,” said Li Lei, an analyst at Minzu Securities. “The growth rate of margin finance will slow down as brokers tighten rules, but the sheer volume will continue to climb to around three trillion yuan.”

 

Disclosures that Central Huijin Investment Ltd. was selling mainland shares of two of China’s largest policy banks— Industrial and Commercial Bank of China Ltd. and China Construction Bank Corp. —came out earlier in the week, but analysts said that Chinese websites and blogs were talking about the sales.

 

ICBC finished down 5% and China Construction Bank was down 5.9% in Shanghai. In Hong Kong, shares of both fell more than 3%.

And since as we explained before the Chinese Politburo is now all in on blowing the biggest equity bubble of all time, consider this a “pause that refreshes” and send the SHCOMP onward to even more ridiculous levels because where central planners are concerned only a grand systemic reset can stop their micromanagement ways.

Elsewhere the Nikkei 225 (+0.4%) outperformed in the region to post its longest winning streak since 1988, underpinned by JPY weakening to 12-year lows

European equities have traded in modest negative territory (Eurostoxx: -0.54%) in a spillover of the sharp losses seen in Asia. Market participants await further comments from the G7 conference regarding Greece with just over one week now until the first IMF payment is due and tensions remaining high regarding whether the country will be able to come to an agreement with their creditors.

This has been similarly demonstrated in Bunds (+23 ticks) with the German benchmark opening higher today but remaining fairly stagnant through the European morning. However, USTs have underperformed their European counterparts this morning ahead of supply coming in the form of USD 13bln FRN 2y note and USD 29bln 7y note auctions

The Asia session saw AUD underperform after Australian Q1 capex recorded its worst decline since 2009, prompting a sell-off across AUD/USD as the pair broke back below 0.7700. NZD weakened in sympathy, as NZD/USD gave back yesterday’s post-Fonterra 2015/16 milk payout inspired gains as the group struck an overall upbeat tone. USD/JPY rose to print its highest level since Dec’02, after tripping stops at the 2007 high (124.14) in continuation of yesterday’s gains with macro funds also said to be buying in the pair.

The European morning’s most notable data point came in the form of UK GDP preliminary reading (Q/Q 0.3% vs. Exp. 0.4%, Prev. 0.3%), which showed the UK economy had grown at a slower rate than expected, thereby weighing on GBP. GBP/USD underperforms major pairs to reside in the red despite the USD-index (-0.2%) also spending the session in negative territory.

In terms of central bank speakers, ECB’s Nowotny says that is not possible to provide financing for Greece outside of the current governing rules, while Fed’s Kocherlakota is scheduled to speak at 1945BST/1345CDT. In terms of the data slate, today’s most notable events are US weekly jobs and pending home sales.

With yesterday’s market rally entirely on the back of yet another fabricated rumor, this time spread by Greek officials to halt a bank run in the process sending the Nasdaq soaring to all time highs, expect even more lies out of the flailing Greek state as there is now just one week until the next Greek IMF payment, one which we now the country won’t be able to make.

Precious metals prices reside in positive territory alongside WTI and Brent crude futures, benefitting from the aforementioned greenback weakness. This comes despite last night’s API inventories showing the first build for 4 weeks (1268K vs. Prev. -5200K). Of note today’s DoE inventories are expected to show a drawdown of 2000k, while NatGas currently underperforms in the energy complex, with today’s EIA NatGas Storage change expected to show a build of 101.

In Summary: European shares fall with the basic resources and autos sectors underperforming and tech, health care outperforming. Chinese stocks fell most in four months on record turnover. ECB Says Contagion Risk Exists If Greek Deal Not Reached Quickly. Fed’s Williams Sees Rate Increase This Year as Growth to Recover. The French and German markets are the worst-performing larger bourses, the Swiss the best. The euro is stronger against the dollar. German 10yr bond yields fall; Japanese yields increase. Commodities gain, with natural gas, silver underperforming and wheat outperforming. U.S. jobless claims, continuing claims, Bloomberg consumer comfort, pending home sales due later.

Whether Greece will get some of this ample global liquidity over the next week or so is no nearer to being decided and yesterday saw a fairly big positive reaction to headlines from the Greeks that they think progress has been made in discussions and that an accord was being drafted. Although these headlines were soon countered by EU officials saying no real progress had been made, the market chose to accentuate the positives.

Indeed, the initial excitement came about from a number of Bloomberg headlines which quoted an unnamed Greek government official as saying that both Greece and its Creditors were about to start drafting a Staff Level Agreement. The report suggested that the agreement would envisage low primary budget surpluses, no recessionary measures, a sales tax overhaul and medium term agreement on debt relief. European equity markets had traded a tad firmer in the run up to the headlines, however the news helped push bourses around a percent higher while Greece’s ASE jumped nearly 2%. The Euro rose around 1% off its lows while Greek 10y yields fell some 50bps, helping other peripheral bond markets tighten 7-8bps. Greek PM Tsipras fuelled hope that there was some credibility in the headlines saying that a deal is close, however the comments out of the European side as mentioned were in stark contrast. EU official Dombrovskis commented that ‘we are still not there yet’ and that ‘we are already basically a month behind the schedule’ while an ECB official was quoted as saying that ‘we do not yet have the catalyst that will allow an agreement’.

There was little change in markets post the initial jump in optimism of a deal being done. The Stoxx 600 eventually closed +1.31% while the DAX and CAC closed +1.26% and +1.70% respectively. Peripherals were unsurprisingly firmer as the IBEX (+1.70%) and FTSE MIB (+2.29%) bounced. Greek equities continued to strengthen into the close meanwhile, eventually finishing +3.55% while there was a sharp move in the yield curve as 2y (-190bps), 4y (-120bps) and 10y (-86bps) yields all fell. 10y yields in Italy (-7.9bps), Spain (-6.5bps) and Portugal (-5.1bps) all finished tighter. Core markets were largely unchanged as 10y Bunds ended +0.7bps higher while similar maturity yields in Netherlands and Switzerland were +0.2bps and +0.9bps respectively. Credit markets had a better day as Crossover in particular rallied 8.5bps.

In the 4-5 months since the elections there have probably been thousands upon thousands of headlines passing through our screens on Greece and the reality is that very few of them have so far ending up meaning anything. However we are deep into the business end of discussions so these headlines are becoming impossible to ignore. So stand-by for a tense week.

In truth outside of Greece there wasn’t a lot of newsflow in markets yesterday. It was pretty quiet data wise with just a modestly better than expected German consumer confidence print (10.2 vs. 10.0 expected), while consumer confidence in France was a touch softer than expected (93 vs. 95 expected). Markets in the US were seemingly supported by the bout of optimism that spread through risk assets yesterday with regards to Greece. The S&P 500 (+0.92%) and Dow (+0.67%) were led by a bounce in tech stocks as the NASDAQ (+1.47%) recorded a fresh record high. 10y Treasuries closed 1.1bps tighter while the Dollar index closed +0.07% higher but had the bulk of the intraday gains wiped out by the stronger Euro yesterday. Oil markets declined for the second consecutive day after both Brent and WTI fell 2.61% and 0.90% respectively on the back of rising crude inventories data.

The hawkish Richmond Fed President Lacker was the latest Fed official to speak yesterday after saying that there is still a strong case to be made for liftoff in June, but that he is yet to have made up his mind. Lacker also warned on the potential effects of moving too late and being ‘behind the curve’, while also taking ‘into account substantial lags in the effect of monetary policy on economic activity’.

Taking a look at our screens this morning, bourses in Asia are largely mixed on the whole. The Nikkei (+0.62%) and Kospi (+0.46%) have risen, while the Shanghai Comp (-1.40%) has fallen for the first time in eight days. The ASX is -0.16% lower also. Equity markets in Japan in particular appear to have shrugged off some weaker data with both April retail sales (+0.4% mom vs. +1.1% expected) and large retailers sales (+8.6% yoy vs. +9.1% expected) coming in below market. It’s a further weakening for the Yen in fact which is helping stocks, with the JPY another 0.38% weaker versus the Dollar this morning at ¥124.12, the fifth consecutive day of declines and 10th in 11 days to mark a fresh 12-year low. Credit markets in Asia meanwhile are being driven by the news that Sunac is abandoning its proposed acquisition of Kaisa Group who recently became the first Chinese property developer to default on US Dollar debt. Kaisa’s 2018 bonds have fallen 3.5 points following the news.

Before we look at today’s calendar, yesterday we published a note highlighting that while optically the USD and GBP IG credit markets appear to offer better value to investors, EUR IG credit is arguably cheaper (relatively) than it first appears. By stripping away non-credit factors such as the underlying rate environment and the currency impact EUR bonds offer similar and occasionally better value than equivalent USD or GBP bonds. Looking at the analysis at an individual bond level we highlight that while the USD and GBP bonds in our analysed samples offer higher yields and generally wider spreads in local currency terms, when we look at spreads in a common currency (using the basis swap) the EUR bonds look more favourable. Specifically from our samples around 70% of the EUR bonds offer wider spreads than equivalent USD bonds while around 60% of the EUR bonds offer wider spreads than equivalent GBP bonds. Essentially our analysis highlights that at current levels the rationale for investing in USD or GBP credit relative to EUR credit is more a function of the underlying government yield environment and the relative currency environment likely to be driven by divergent monetary policy actions. Therefore there may be better ways to express these views than with corporate bonds.

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NY trading for today:

Dead Markets Drifting As Dollar Drops