Good evening Ladies and Gentlemen:
Here are the following closes for gold and silver today:
Gold: $1138.20 down $15.20 (comex closing time)
Silver $14.61 down 15 cents.
In the access market 5:15 pm
Here is the schedule for options expiry:
Comex: options expire tomorrow night
LBMA: options expire Monday, August 31.2015:
OTC contracts: Monday August 31.2015:
needless to say, the bankers will try and contain silver and gold until Sept 1.2015:
First, here is an outline of what will be discussed tonight:
At the gold comex today, we had a good delivery day, registering 59 notice for 5900 ounces Silver saw 24 notices for 120,000 oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 226.94 tonnes for a loss of 76 tonnes over that period.
In silver, the open interest fell by 1537 contracts as silver was down in price by 54 cents yesterday. Something, again really spooked our shorts as they ran to the hills to cover. The total silver OI now rests at 169,111 contracts In ounces, the OI is still represented by .845 billion oz or 120% of annual global silver production (ex Russia ex China).
In silver we had 24 notices served upon for 124,000 oz.
In gold, the total comex gold OI rests tonight at 438,785. We had 59 notice filed for 5900 oz today.
We had another huge addition of 3.27 tonnes to the GLD today / thus the inventory rests tonight at 681.10 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold. It sure looks like 670 tonnes will be the rock bottom inventory in GLD gold. It looks to me that China has taken the last amounts of physical gold from the GLD. I guess the only place left for China to receive physical gold will be the FRBNY and the comex. In silver, we had no changes in silver inventory at the SLV tune of / Inventory rests at 324.968 million oz.
We have a few important stories to bring to your attention today…
1. Today, we had the open interest in silver fall by 1537 contracts down to 169,111 as silver was down by 54 cents in price with respect to yesterday’s trading. The OI for gold rose by 855 contracts to 439,640 contracts, despite the fact that gold was down by $6.20 yesterday. We still have 16.4140 tonnes of gold standing with only 14.68 tonnes of registered gold in the dealer vaults ready to satisfy that which stands.
2.Gold trading overnight, Goldcore
3. Six stories on the collapsing Chinese markets, the devaluation of the yuan and the huge downfall in trading last night followed by today’s announcement of an RRR cut and also interest rate cuts. The move was to provide needed liquidity because China lost huge reserves protecting the yuan these past 6 weeks.
4. Troubles in Saudi Arabia
5. Troubles in one of the big emerging nations, Brazil
6. These emerging nations are already in correction mode:
8 Trading of equities/ New York
10. USA stories:
- Shiller home prices falters a bit in today’s report(Case Shiller)
- Richmond Manufacturing Fed falls to lowest level this year.(Richmond Fed/zero hedge)
- USA PMI service index falls to lows of the year (PMI/zero hedge)
- Take your pick on confidence levels: Government conference board high/Gallup low
- Zero hedge on the real truth behind yesterday’s HFT trading
11. Physical stories:
- Bill Holter interview
- John Embry talks with Eric King
- EU Probe on gold/silver manipulation (Bloomberg)
- Koos Jansen on the reason for the devaluation of the yuan/revaluation of gold against the yuan.
Let us head over and see the comex results for today.
August contract month:
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz||14,680.971 oz (Scotia)|
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz||nil|
|No of oz served (contracts) today||59 contract (5,900 oz)|
|No of oz to be served (notices)||1392 contracts (139,200 oz)|
|Total monthly oz gold served (contracts) so far this month||3885 contracts
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||574,533.5 oz|
Total customer deposit: nil oz
JPMorgan has 7.1966 tonnes left in its registered or dealer inventory. (231,469.56 oz) and only 741,358.273 oz in its customer (eligible) account or 23.05 tonnes
We lost 25 contracts or an additional 2500 ounces will not stand for delivery. Thus we have 16.414 tonnes of gold standing and only 14.78 tonnes of registered or dealer gold to service it. Today, again, we must have had considerable cash settlements.
August silver initial standings
August 25 2015:
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory||21,323.33 oz (HSBC,Brinks)|
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||891,995.34 oz (Brinks,JPMorgan)|
|No of oz served (contracts)||24 contracts (120,000 oz)|
|No of oz to be served (notices)||1 contract (5,000 oz)|
|Total monthly oz silver served (contracts)||325 contracts (1,625,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||85,818.47 oz|
|Total accumulative withdrawal of silver from the Customer inventory this month||8,349,485.0 oz|
total dealer deposit: nil oz
Today, we had 0 deposits into the dealer account:
total customer deposits: 891,995.340 oz
total withdrawals from customer: 21,323.33 oz
we neither gained nor lost any silver ounces standing in this no active delivery month of August.
August 12./ a huge deposit of 4.18 tonnes of gold into the GLD/Inventory rests at 671.87 tonnes
August 7./no change in gold inventory at the GLD/Inventory rests at 667.93 tonnes August 6/no change in gold inventory at the GLD/Inventory rests at 667.93 tonnes August 5.we had a huge withdrawal of 4.77 tonnes from the GLD tonight/Inventory rests at 667.93 tonnes
August 4.2015: no change in inventory/rests tonight at 672.70 tonnes
And now SLV:
August 25.2015:no change in inventory at the SLV/Inventory rests at 324.698 million oz
August 24./no change in inventory at the SLV/Inventory rests at 324.698 million oz
August 21.2015/ no change in inventory at the SLV/Inventory rests at
324.698 million oz
August 20.2015:/no changes in inventory at the SLV/Inventory rests tonight at 324.698 million oz
August 19/no changes in inventory at the SLV/Inventory rests tonight at 324.698 million oz
August 18.2015: no changes in inventory at the SLV/Inventory rests tonight at 324.968 million oz
August 17.2015: no changes in inventory at the SLV/Inventory rests tonight at 324.968 million oz.
August 14/no changes in inventory at the SLV/Inventory rests at 324.968 million oz.
August 13.2013: a huge withdrawal of 1.241 million oz/Inventory rests tonight at 324.968 million oz
August 12.2015: no change in SLV inventory/rests tonight at 326.209 million oz.
August 11./ no changes in SLV inventory/rests tonight at 326.209 million oz.
August 7.no changes in SLV/Inventory rests this weekend at 326.209 million oz
August 6/no changes in SLV/inventory rests at 326.209 million oz
August 5/ a small withdrawal of 142,000 oz of inventory leaves the SLV/Inventory rests tonight at 326.209 million oz
August 4.2015: a small withdrawal of 476,000 oz of inventory at the SLV/Inventory rests at 326.351 million oz August 3.2015; no change in inventory at the SLV/inventory remains at 326.829 million oz
Sprott formally launches its offer for Central Trust gold and Silver Bullion trust:
SII.CN Sprott formally launches previously announced offers to CentralGoldTrust (GTU.UT.CN) and Silver Bullion Trust (SBT.UT.CN) unitholders (C$2.64) Sprott Asset Management has formally commenced its offers to acquire all of the outstanding units of Central GoldTrust and Silver Bullion Trust, respectively, on a NAV to NAV exchange basis. Note company announced its intent to make the offer on 23-Apr-15 Based on the NAV per unit of Sprott Physical Gold Trust $9.98 and Central GoldTrust $44.36 on 22-May, a unitholder would receive 4.45 Sprott Physical Gold Trust units for each Central GoldTrust unit tendered in the Offer. Based on the NAV per unit of Sprott Physical Silver Trust $6.66 and Silver Bullion Trust $10.00 on 22-May, a unitholder would receive 1.50 Sprott Physical Silver Trust units for each Silver Bullion Trust unit tendered in the Offer. * * * * *
Gold Glimmers as Global Market Fear Grips Investors
Today’s Gold Prices: USD 1,154.25, EUR 999.35 and GBP 730.56 per ounce.
Yesterday’s Gold Prices: USD 1,153.50, EUR 1,005.93 and GBP 734.34 per ounce.
Gold in USD – 1 Year
Yesterday, gold rose initially prior to selling in the futures market saw gold fall $6.30 to $1153.10 in New York and ended down just 0.5%. Silver slipped 50 cents to $14.78 per ounce. Gold in euros and sterling fell by slightly more but still outperformed falling stock markets.
Gold performed well considering the stock market bloodbath yesterday. The fact that it is was only marginally lower despite market carnage bodes very well indeed for the coming months.
Frequently, gold is correlated with equities in the very short term and can fall when stock markets suffer sharp one day corrections. However, over the month and the quarter, gold has an inverse correlation with equities.
Gold appears to have once again anticipated the crisis and is acting like a safe haven in recent days – just at the moment when western investors need a safe haven and wealth preservation most.
We appear to be on the verge of new bear market in stocks and as we have been warning for some months now there is a real risk of a 1929 or 1987 style crash.
It is time to take stock and reduce allocations to equities and increasing allocations to cash and gold bullion.
Gold Glimmers as Global Market Fear Grips Investors
Gold last week broke above its 50-day moving average as a fresh round of negative news from around the globe rekindled investors’ interest in the yellow metal as a safe haven.
The ‘Fear Trade’, it seems, is in full force. Below are just a few of the recent news items that have made some investors skittish, which has supported gold prices:
- China, the world’s second-largest economy, continues to slow. Its preliminary purchasing managers’ index (PMI) reading, released on Friday, came in at 47.8, a 77-month low. This follows China’s decision to devalue its currency, the renminbi, close to 2 percent. For the first time in a year, the Shanghai Composite Index fell below its 200-day moving average.
- Crude oil is on an eight-week losing streak, the longest in 29 years. West Texas Intermediate (WTI) slipped below $40 per barrel in intraday trading Friday, the first time it’s done so since 2009.
- U.S. stocks are undergoing an ugly selloff. They just had their worst week since September 2011 and are on track to post their worst month since May 2012. The Dow Jones Industrial Average, down 10 percent since its all-time high, is nearing correction territory. All 10 S&P 500 Index sectors were off last week.
- We can also add to this list the high levels of margin lending on the New York Stock Exchange (NYSE) right now. At the end of every month, the exchange discloses margin amounts, and it appears that everyone is leveraged. Real margin debt growth since 1995 is twice as much as real S&P 500 growth.
Frank Holmes is a leading expert on gold, precious metals and the natural resource market. He is CEO and chief investment officer at U.S. Global Investors Inc.. He is a regular commentator on the financial television networks CNBC, Bloomberg and Fox Business, and has been profiled by Fortune, Barron’s, The Financial Timesand other publications. He came up with the concept of the ‘fear trade’ and the ‘love trade’ in gold. This simply means many investors particularly in the West buy gold on ‘fear’ or concerns about risks in markets but that there are also many who buy gold due to their cultural affinity and a ‘love’ of gold – particularly in the Middle East, India, China and most of Asia.
Holmes latest research piece on gold is timely and as ever well worth a read and is published on Forbes here
“Frequently, gold is correlated with equities in the very short term” said GoldCore – MarketWatch
Gold holds below seven-week high as dollar, equities recover – Reuters
Dow Industrials Tumble Nearly 600 Points Amid Global Market Selloff – The Wall Street Journal
China share plunge smacks world markets; S&P, Nasdaq in correction – Reuters
Chinese Stocks Crash Again to Extend Biggest Plunge Since 1996 -Bloomberg
Gold Glimmers as Global Market Fear Grips Investors – Forbes
Peak Gold Is Looming – Bloomberg
SWOT Analysis: Will Gold’s Oversold Rebound Continue? – GoldSeek.com
AEP: China’s market Leninism turns dangerous for the world – The Telegraph
“Hang On To Your Gold” – Stepek – MoneyWeek
Click on News and Commentary
Koos Jansen: Theory on China’s gold strategy
Submitted by cpowell on Mon, 2015-08-24 12:05. Section: Daily Dispatches
8a ET Monday, August 24, 2015
Dear Friend of GATA and Gold:
Gold researcher and GATA consultant Koos Jansen writes today that the policies of the People’s Bank of China imply more moves toward gold for itself and for the country’s population as the bank uses gold as a mechanism for adjusting the value of the nation’s currency — just as the enabling act for the European Central Bank authorizes that bank to trade currencies and gold to adjust the value of the euro.
Jansen reports that when China devalued its currency, the yuan, by 3 percent the other day, the gold price in yuan rose 5 percent.
Of course the U.S. government, through the Gold Reserve Act of 1934, as amended, long has authorized itself to trade secretly in any market not just to adjust the value of the dollar but to rig any market whatsoever, even as the U.S. government preaches free markets to the rest of the world.
Jansen’s analysis is headlined “Theory on China’s Gold Strategy” and it’s posted at Bullion Star here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
As a follow up from yesterday’s A Weekend’s Heads Up , my thoughts were truly an understatement for today’s action! The open was far weaker than I had anticipated, down 1,089 points. This was the biggest point drop in Dow history. The volatility was out of control with the VIX trading to 53, the highest since Feb. 2009! An illustration of how much and how fast the volatility was, total point movement in the first 90 minutes was 3,000 Dow points, 4,900 total for the day! Truly incredible!
Today was all about credibility and confidence. “They” could not allow what actually happened because it showed weakness. Or better yet, it exposed their inability to hold it all together. Today was not about margin calls, Mom and Pop selling or even mutual fund/pension plans. No, you saw “algorithms” go wild today and it turned out the algos were bigger than the PPT. Huge mistake by the PPT because just as in a street fight, “weakness” provokes aggression and now the algos know how powerful their punch is! They could not let “it happen” …they did, HUGE MISTAKE!
After the close, the muppets at CNBC are already pleading for help from the Fed. Jim summed it up when he penned this:
“A market break like today (called recalibration by financial TV money bunnies) in which the PPT was defeated screams “ultimate deflation.”
The immediate implication of “Ultimate Deflation” among the unwashed and not knowing is bearish on gold.
The basis for our thesis on gold and major new highs in metals is “Ultimate Deflation” and how global central banks will react.”
For those who do not understand, the Fed (as I mentioned yesterday and previously) has a zero percent chance of raising rates and will in fact be forced into further QE. The “Ultimate Deflation” we are experiencing guarantees that central banks ALL OVER THE WORLD will be forced to print and debase furiously! It is not the current action that will kill you…it is the REACTION from the central banks!
Today was a “warning shot” to start, maybe even a shot INTO the bow as the close stunk up the joint. I still expect some sort of stabilization where investors (lead on by the CNBC muppets) will breathe a very short term sigh of relief. Whether this lasts only a day or two or several weeks, I have no idea. I would suggest that any stability should be used as an exit!
Speaking of “exits”, if I were the Chinese or other large holders of Treasuries, I would be using the current strength as my exit plan. Capital poured into Treasuries in a safe haven bid, I would use these bids and hit them with everything I had. In fact, I believe we may very soon see the day when the U.S. Treasury market gets hit hard along with stocks and the dollar. This will be your clue the “end” is quite imminent. WATCH TREASURY YIELDS, when they inexplicably begin to rise, understand what they are telling you!
Lastly, this is not about China, it is not a “correction”, it is not because of a “slowdown”. This is the beginning of the Great Credit Unwinding and will take EVERYTHING “credit” with it. Do you understand what “everything credit” actually is?
In today’s world, anything and everything financial (including real estate) is credit. EVERYTHING is now credit! By now I probably should not have to explain what is “not credit”. Simply put, “real physical gold and silver unencumbered”.
You will soon see this as the credibility of central banks will be called into question. The viability of derivatives will be called into question. The solvency of sovereigns (including the U.S. Treasury) will be called into question. The entire global fiat system will be called into question! The conversation may go something like this;
You have been weighed. You have been measured.
And you have absolutely…
Been found wanting!
Welcome to the New World. God save you, if it is right that he should do so.
It has been and is all about “confidence”. Confidence has been the ONLY thing holding the Ponzi scheme together. The PPT allowed confidence a very black and swollen eye today. Nothing “credit” on the planet will stand upon the knockout of confidence!
Comments welcome email@example.com
August 25, 2015 — 5:15 AM EDT Updated on August 25, 2015 — 11:35 AM EDT
European Union antitrust regulators are investigating precious-metals trading following a U.S. probe that embroiled some of the world’s biggest banks.
The European Commission disclosed the review after HSBC Holdings Plc said in a filing earlier this month that it had received a request for information from the EU in April. The watchdog is examining possible anti-competitive behavior in spot trading, Ricardo Cardoso, a spokesman for the regulator, said in an e-mail.
“This is just another potential scandal where fines will suppress banks’ earnings, and rightly so,” said Sandy Chen, a London-based banking analyst at Cenkos Securities Plc.
U.S. prosecutors have been examining whether at least 10 banks, including Barclays Plc, JPMorgan Chase & Co. and Deutsche Bank AG, manipulated prices of precious metals such as silver and gold. The scrutiny follows international probes into the rigging of financial benchmarks for rates and currencies, which have yielded billions of dollars in fines.
The trio was among financial companies that agreed in an EU settlement to pay a total of 1.7 billion euros($1.9 billion) in December 2013 for colluding over derivatives linked to the London and euro interbank offered rates. HSBC remains under investigation in the Euribor case after refusing to join the accord.
HSBC ‘Cooperating’HSBC said in its half-year earnings report on Aug. 3 that the Brussels-based commission in April sought details about its precious-metals operations and that it’s “cooperating” with the authorities.
In the U.S., UBS Group AG said in May that it won immunity from criminal fraud charges in a Justice Department investigation into misconduct in the trading of precious metals.
The Swiss bank has successfully dodged antitrust penalties after blowing the whistle. It avoided a 2.5 billion-euro EU fine after helping officials with their yen Libor case. The company is also poised to get immunity in the EU’s currency rigging case, a person familiar with that probe said last year.
UBS declined to comment on the EU metals inquiry beyond its second-quarter report, which noted investigations by a number of authorities into precious-metals prices.
Barclays said in a July filing it has been “providing information to the DOJ and other authorities in connection with investigations into precious metals and precious metals-based financial instruments.”
Joanne Walia, a Barclays spokeswoman, declined to comment on whether the authorities included the EU. Representatives for the other banks didn’t immediately respond to requests for comment.
The EU’s investigation is preliminary at this stage and the regulator doesn’t always levy fines or sanctions.
(courtesy John Embry/Kingworldnews/Eric King)
On KWN, Embry discusses China crash and PPT’s rescue of U.S. stocks
Submitted by cpowell on Tue, 2015-08-25 12:11. Section: Daily Dispatches
8:10a ET Tuesday, August 25, 2015
Dear Friend of GATA and Gold:
Sprott Asset Management’s John Embry, interviewed by King World News, discusses China’s stock market crash and the work of the Plunge Protection Team in pushing the U.S. stock market back up on Monday. An excerpt from the interview is posted at the KWN blog here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
1 Chinese yuan vs USA dollar/yuan falls considerably this time to 6.4115/Shanghai bourse: red and Hang Sang: green
Surprisingly, last week, officially, China added another 19 tonnes of gold to its official reserves now totaling 1677.
2 Nikkei down 733.98 or 3.96.%
3. Europe stocks all deeply in the green (with the new Chinese rate cut) /USA dollar index up to 94.03/Euro down to 1.1504
3b Japan 10 year bond yield: rises to .378% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 120.08
3c Nikkei now below 20,000
3d USA/Yen rate now just below the 121 barrier this morning
3e WTI 39.36 and Brent: 44.00 (this should blow up the shale boys)
3f Gold down /Yen down
3gJapan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil up for WTI and up for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund rises hugely to .695 per cent. German bunds in negative yields from 4 years out.
Except Greece which sees its 2 year rate falls slightly to 13.27%/Greek stocks this morning up by 8/36%: still expect continual bank runs on Greek banks /
3j Greek 10 year bond yield rises to : 10.06%
3k Gold at $1148.50 /silver $14.80 (8 am est)
3l USA vs Russian rouble; (Russian rouble up 1 1/4 in roubles/dollar) 69.62,
3m oil into the 39 dollar handle for WTI and 44 handle for Brent/Saudi Arabia increases production to drive out competition.
3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation (already upon us). This can spell financial disaster for the rest of the world/China forced to do QE!! as it lowers its yuan value to the dollar.
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning .9421 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0837 well above the floor set by the Swiss Finance Minister. Thomas Jordan, chief of the Swiss National Bank continues to purchase euros trying to lower value of the Swiss Franc.
3p Britain’s serious fraud squad investigating the Bank of England/
3r the 4 year German bund now enters in negative territory with the 10 year moving further from negativity to +.695%
3s The ELA lowers to 89.7 billion euros, a reduction of .7 billion euros for Greece. The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Greece votes again and agrees to more austerity even though 79% of the populace are against.
4. USA 10 year treasury bond at 2.07% early this morning. Thirty year rate below 3% at 2.81% / yield curve flatten/foreshadowing recession.
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
US Equity Futures Soar 4% After PBOC Rate Cut; Chinese Futures Jump After Overnight Market Crash
The PBOC was supposed to cut rates over the weekend – the risk, as we warned on Friday, was that it would not. It did not, and the result was a 16% plunge for the Shanghai Composite over the past two days as China’s underwater investors realized China may have finally forsaken them, which dragged down the benchmark index not only red, but down 7% for the year after it had been up 60% in mid-June.
Still, while China was crashing overnight (it closed down 7.6% at 2,965, or below the “other” hard support level, down 16% in the past two days), other markets were relatively stable, if weak toward the end such as the Nikkei which tumbled 5%, soared 2% then retumbled 4% into the close although both Europe and the US posted solid gains in overnight trading as if they knew that an intervention by China was imminent. Whether or not they did is irrelevant but as we reported minutes ago, the PBOC finally did what everyone had expected it would do over the weekend, and cut the benchmark lending and deposit rates by 25%, while cutting its Required Reserve Ratio by 50bps, in the process sending global risk soaring because this time China’s rate cut will supposedly be different than the last one just two months ago on June 27.
Here is the recent history of China RRR cuts:
- February 4: 50 bps
- April 19: 100 bps
- June 27: 50 bps
- August 25: 50 bps
Including regular benchmark rate cuts, this is the 5th time the PBOC has cut since November.
The strategists are promptly lining up to predict even more RRR cuts in coming days as China tacitly admits its economic situation is far worse than expected: case in point HSBC’s co-head of Asian economic research Fred Neumann who told Bloomberg that China’s central bank will probably cut the reserve requirement ratio by at least another 100 basis points “in the coming months.”
- Rate cuts should have stabilizing effect on investor sentiment; in itself not enough to boost economic growth
- “It does signal that Chinese officials have become more worried about the prospects for the economy and makes it more likely that they’ll follow up with further easing measures in the coming weeks and months”: Neumann
- “Investors had been hoping for more policy easing and Chinese officials finally delivered”: Neumann
- Beijing will probably roll out further easing measures, including monetary easing to support construction sector and fiscal measures to boost consumer spending: Neumann
Needless to say, 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 bank bailouts around the globe. 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.
Algos, however are happy to buy now and ask questions later, and as of moments ago the market reaction was initially ebulient:
- China A50 stock futures soar +435
- Dow futures +602, up 4%
- S&P500 futures +72, up 4%
- Nasdaq Futures +184
- Germany’s Dax up over 3%
- USD/JPY rises to 119.98
- EUR/USD tumbles 1.22% to 1.1477 after stops below 1.15 are triggered
- Stoxx 600 rises 14.79 to 356.80; fell 19.27 yday
- Sept. bund future falls as much as 141 ticks to 154.27
- German 10Y yield +10bps to 0.69%, US 10Y yield +8bps to 2.08%
- iTraxx Main index -4bps to 74, iTraxx Crossover index -20bps to 345
- WTI futures +$1.38 to $39.68/bbl, up 3.5% at last check
As a warning, the kneejerk reaction numbers are moving so fast by the time we hit save, we fully expect them to be no longer even remotely close to the current situation.
So while we, the vacuum tubes, and everyone else processes the latest Chinese monetary bailout, here are some of tonight’s highlights from Bloomberg and RanSquawk:
- Treasuries decline after overnight rebound in stocks and oil and as China cuts benchmark lending rate and reserve requirement ratio; week’s auctions begin with $26b 2Y, WI 0.665% vs. 0.69% in July.
- China halted intervention in stock market so far this week as policy makers debate merits of government campaign to prop up share prices and what to do next, according to people familiar with situation
- PBOC cut its benchmark lending rate for fifth time since Nov., lowering it by 25bps to 4.6% and the deposit rate by 25bp to 1.75% effective Wednesday; cut reserve ratio by 0.5ppt, effective Sept 6
- Some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year, said people familiar with the matter
- Franklin Templeton’s Mark Mobius says investors should hold off from buying developing nation shares as a rebound from six-year lows will be shortlived amid widening price swings
- Germany’s Ifo institute business climate index climbed to 108.3 from 108 in July. The median estimate was for a decline to 107.6, according to a Bloomberg survey of economists
- NYC Mayor Bill de Blasio, a Democrat who vowed to use the 2016 presidential campaign to raise the nation’s awareness of income inequality, has become the target of Republican candidates who call him a symbol of inept liberalism
- No IG or HY deals priced yesterday. BofAMLCorporate Master Index +3 to new YTD wide +172, widest since Sept 2012; YTD low 129. High Yield Master II OAS +28bp to new YTD wide 614, widest since July 2012; YTD low 438
- Sovereign 10Y bond yields higher. Asian stocks mixed, European stocks and U.S.equity-index futures gain. Crude oil and copper higher, gold falls
Last night: China devalues
China again devalues, as stocks plummet. China desperately trying to stem the flow of liquidity out of the country. After the market closed in desperation they cut rates (see second commentary)
(courtesy zero hedge)
AsiaPac Stocks Continue Collapse As Yuan Deposit Rates Spike To Record High, China Devalues, Japan Denies “G7 Response” Being Planned
Following yesterday’s bloodbath (and the continued carnage around the world), AsiaPac stocks are lower with Japan unable to mount any sustained bounce despite every effort to lift JPY. The propaganda-fest is in full swing as Amari claims JPY is safe-haven asset and Aso denies any coordinated G7 response is being planned (which means they are all feverishly trying to fgure out how to ‘save’ the world again from a 4-day stock drop). China is ugly with stocks down hard in the pre-open (CSI-300 -4.3%) as offshore Yuan depo rates spike to 22.9% – a record high – as liquidty outflows must be accelerating (as PBOC adds another CBNY150bn liquidty). China devalues Yuan 0.2% – most in 11 days.
The Japanese are in full propaganda mode…
- *SUGA: WATCHING MARKET MOVES ATTENTIVELY
- *ASO: FX MOVES HAVE BEEN ROUGH (“rough” – well that’s one word for complete and utter carnage)
- *ASO: CONTINUING TO CLOSELY WATCH MARKET MOVES
- *ASO: I HAVEN’T CONTACTED U.S. TREASURY(which means he has!)
- *ASO: NOT AT STAGE FOR G-7, G-20 RESPONSE(which means there is)
- *AMARI: UP TO BOJ TO DECIDE ON ADDL EASING (how’s that last QQE2 working out?)
- *AMARI: YEN IS BEING BOUGHT AS SAFE ASSET (nope it’s a forced carry unwind sorry!)
- *AMARI:YEN SEEN AS SAFE ASSET SHOWS VALUATION OF JAPAN ECONOMY (what utter crap!)
So we await the coordinated response to the global vicious circle of carry unwinds and forced liquidations… but remember, RRR cuts so far have done absolutely nothing to hold back wave after wave of frenzied malicious Chinese sellers just wanting out of the ponzi.
The talk is not working as Chinese stocks are weak in the pre-open…
- *FTSE CHINA A50 SEPT. FUTURES DROP 3.4% IN SINGAPORE
- *CHINA CSI 300 STOCK-INDEX FUTURES FALL 4.3%
Some good news… China is deleveraging…
- *SHANGHAI MARGIN DEBT DECLINES TO LOWEST IN FIVE MONTHS
As China devalues Yuan by most in 11 days..
- *PBOC WEAKENS YUAN FIXING BY 0.2%, MOST SINCE AUG. 13
- *CHINA SETS YUAN REFERENCE RATE AT 6.3987 AGAINST U.S. DOLLAR
And China adds yet more liquidity…
- *PBOC TO INJECT 150B YUAN WITH 7-DAY REVERSE REPOS: TRADER
The desperation to keep liquidity from flooding out is very evident:
- *ONE-WEEK OFFSHORE YUAN DEPOSIT RATE JUMPS 840 BPS TO 22.9%
- *YUAN DEPOSIT RATE HEADED FOR RECORD CLOSE IN HONG KONG
“Some are converting yuan back into USD or HKD amid the devaluation,’’ says Lawrence Kung, head of deposits department at Wing Lung Bank in Hong Kong
* * *
Hope continues for a huge broad-based RRR cut but The PBOC – just as it said – remains fixed on small targeted liquidity injections. This will not please the ‘people’ or Jim Cramer… “they know nothing.”
* * *
And finally, we could not have put it better than The Onionas they explain how the “Shoddy Chinese-Made Stock Market Collapses”…
Proving to be just as flimsy and precarious as many observers had previously warned, the Chinese-made Shanghai Composite index completely collapsed Monday, sources confirmed.
“Sure, it looked fine from the outside, but anybody who saw it up close knew that it was of such poor quality that it wasn’t built to last,” said Allen Sigman of the London School of Economics, adding that the stock market, which he described as a crude knockoff of Western versions, was practically slapped together overnight and featured countless obvious structural weak points.
“They pretty much ignored regulations, and inspections were a joke. The only surprise is that it didn’t fall apart sooner.” Sigman added that he just hopes there weren’t too many people who were hurt in the disaster.
* * *
We assume that is satire… though it does seem a little too real.
China Cuts Benchmark Interest Rate By 25bps, Cuts RRR By 50bps
What China was supposed to do over the weekend, and waited until its stock market tumbled another 16%, it has just done, because as MarketNews, Reuters and Bloomberg all just blasted, moments ago the PBOC cut both the benchmark and RRR rates:
- CHINA PBOC CUTS INTEREST RATES
- CHINA PBOC CUTS REQUIRED DEPOSIT RESERVE RATIO
- CHINA PBOC CUTS 1Y DEPOSIT RATE BY 25 BPS
- CHINA PBOC CUTS 1Y LENDING RATE BY 25 BPS
- CHINA PBOC CUTS BANKS DEPOSIT RESERVE RATIO BY 50 BPS
- CHINA PBOC: OVERALL PRICE LEVEL STILL LOW DESPITE PORK PRICE
- CHINA PBOC: GLOBAL FINANCIAL MKT SEES BIG VOLATILITY
- CHINA PBOC: ECO STILL FACING DOWNWARD PRESSURE
- CHINA PBOC LIFTS CEILING ON DEPOSIT INTEREST RATES
From the PBOC:
People’s Bank of China, from August 26, 2015, down financial institutions RMB benchmark lending and deposit interest rates in order to further reduce financing costs. Among them, one-year benchmark lending rate by 0.25 percentage point to 4.6%; year benchmark deposit rate by 0.25 percentage point to 1.75%; all other grades of loans and deposit benchmark interest rate, adjusted individual housing provident fund deposit and lending rates. Meanwhile, the release of more than one year (excluding one year) fixed deposit interest rate floating ceiling, demand deposits and time deposits of one year or less floating interest rate ceiling unchanged.
Since September 6, 2015, down financial institutions RMB deposit reserve ratio by 0.5 percentage points, in order to maintain reasonably adequate liquidity in the banking system, guide steady moderate growth of money and credit. Meanwhile, to further enhance the financial institutions to support the “three rural” and the ability of small and micro enterprises, additional lower county rural commercial banks, rural cooperative banks, rural credit cooperatives and rural banks and other rural financial institutions reserve ratio by 0.5 percentage points. Additional reduction of financial leasing companies and auto finance companies reserve ratio three percentage points, to encourage it to play a good role in the expansion of consumption.
This move takes the RRR from 18.50% to 18.00%, the deposit rate from 2.00% to 1.75%, the lending rate from 4.85% to 4.60%, and the PBOC also announced a further 300 bps RRR cut for financial leasing and auto leasing companies.
Here is the initial take from the WSJ:
China on Tuesday cut interest rates by one-quarter of a percentage point and reduced bank-reserve requirements by half of a percentage point amid market turmoil.
China also did away with its ceiling on most bank deposits.
The People’s Bank of China said in a statement on its website that it also cut bank reserve requirements for rural banks by an additional half a percentage point.
The interest-rate cut is effective Wednesday, while the reserve-requirement reduction is effective Sept. 6. The rate cut is the fifth by the Chinese central bank since November, while the reserve-requirement cut for all banks is the third this year.
The moves came after China’s stock-market slumped again amid worries over a slowdown in growth. Its main stock index fell 7.6% on Tuesday after an 8.5% fall on Monday, bringing it down more than 20% over four trading days.
This is what the PBOC said in connection to the rate cut (google translated):
1. what the introduction of the combination of measures to cut interest rates drop quasi major consideration is?
A: At present, China’s economic growth is still downward pressure, steady growth, adjusting structure, promoting reform, benefit people’s livelihood and risk prevention task is still very arduous, global financial markets recently greater volatility, the need for more flexible use of monetary policy tools to create a favorable environment for monetary and financial adjustment of economic structure and stable and healthy economic development.
The lower the benchmark interest rate loans and deposits, the main purpose is to continue to play a guiding role good benchmark interest rate, help lower the cost of financing community to support the sustainable and healthy development of the real economy. Since November 2014, the PBC has four lowered the benchmark interest rate loans and deposits, guide financial institutions lending rates continued to decline. July 2015, the weighted average interest rate of loans from financial institutions was 5.97%, the first decline since 2011 to the level of financing high social cost below 6% effective mitigation. Although the past two months, CPI rose slightly, but the main impact of structural factors such as rising pork prices are significantly affected, the overall price level is still at historically low levels, but also for the re-use price tools to further contribute to the reduction of social financing the cost of providing the conditions. To this end, the approval of the State Council, the People’s Bank of China decided to further cut the benchmark interest rate loans and deposits, lending rates of financial institutions and to promote all kinds of market interest rates continue downward, to consolidate the macro-control policy effects preliminary.
The lower the deposit reserve ratio, mainly based on changes in the banking system liquidity, adequate long-term liquidity, in order to maintain adequate liquidity and reasonable, and promote stable and healthy economic development. People’s Bank recently improved the exchange rate of the RMB against the US dollar quotation mechanism, and spreads over the central parity and the market exchange rate correction, reaching equilibrium in the foreign exchange market in the process, can cause fluctuations in liquidity, requiring remedy the resulting liquidity gap and reduce the deposit reserve ratio may play such a role. In addition, the county additionally reduce rural commercial banks, rural cooperative banks, rural credit cooperatives, rural banks and financial leasing companies, auto finance companies RRR, related primarily to guide financial institutions to further increase the “three rural “Small and micro enterprises and the expansion of consumer support.
2, the combination of interest rate cuts open the background and significance of what one-year deposit rate over the floating ceiling is? Why should we continue to keep the upper limit of the floating interest rate deposits and demand deposits within the same year?
A: According to the State Council’s strategic plan, in recent years, the People’s Bank to accelerate market-oriented interest rate reform, and made important progress. Currently, in addition to the deposit interest rate controls have been fully liberalized, the deposit rate floating ceiling has been expanded to 1.5 times the benchmark interest rate for businesses and individuals formal certificates of deposit issued, the market interest rate pricing mechanism and continuously improve self-discipline, the central bank interest rate management capacity to gradually enhance the smooth introduction of the deposit insurance system, further promote market-oriented reform of interest rate conditions are more mature. Meanwhile, the current overall price level in China is low, the total amount of ample liquidity in the banking system, relatively small upward pressure on market interest rates, but also to promote market-oriented interest rate reform to provide a better macroeconomic environment and the time window.
In this case, put the reform in regulation with a combination of interest rate cuts and further promote the interest rate market-oriented reforms, open the one-year deposit interest rate floating above the upper limit of interest rate reform marks another important step forward. As financial institutions to further expand the independent pricing space, is conducive to the promotion of independent pricing capability of financial institutions to improve and accelerate the transformation of the business model, improve financial services, but also help promote the fund price more realistically reflect the market supply and demand, give full play to the market decisive action, and further optimize the allocation of resources, promoting economic structure adjustment and transformation and upgrading, create favorable conditions for healthy and sustainable economic and financial development.
Remain within the one-year deposit and deposit interest rate floating ceiling unchanged, reflecting the “first long-term, short-term,” the basic order of progressive liberalization of deposit interest rate ceiling of reform ideas, but also with international practice consistent. Judging from past experience, this order to promote market-oriented interest rate reform, help foster and exercise independent pricing capability of financial institutions, to lay a more solid foundation for the full realization of the final interest rate market; but also conducive to the stability of financial institutions deposit interest rate and overall financing costs, contribute to the reduction of social financing costs, for the sustained and healthy economic development has a positive meaning.
3, release the one-year deposit rate over the floating cap, how to guide scientific and rational pricing of financial institutions?
A: The release of more than a year after the floating deposit rate cap, the PBC will continue to improve related measures, further scientific and rational pricing guide financial institutions to maintain a fair and orderly market competition order. First, we continue to publish benchmark deposit rate by existing maturities. Further play the guiding role of the benchmark rate, providing an important reference for the one-year deposit rate over pricing. Second is to improve the regulation of interest rates and the transmission mechanism. Further improve the central bank interest rate management system, enhance the ability to control interest rates. Strengthen financial market benchmark interest rate to cultivate and improve the market interest rate system, improving monetary policy transmission. Third is to play the role of industry self-regulation. Guide market interest rate pricing discipline mechanism to further play an important role in a good industry pricing discipline, in accordance with the principles of compliance with laws and regulations, incentives and constraints of both, for a better interest rate pricing financial institutions continue to give priority to give more power market pricing and product innovation, expand the main issue certificates of deposit and interbank deposit investment range; with the necessary self-restraint on deposit interest rates beyond a reasonable level, disrupt the market order financial institutions.
4. recent central bank action to provide liquidity What?
A: The central bank to provide liquidity more channels and tools, in addition to the RRR, the recent expansion of the central bank has also implemented a reverse repo, the medium-term lending to facilitate (MLF), supplementary mortgage loans (PSL) and so increase market liquidity and loanable funds initiatives. Since August, the cumulative carry out reverse repo operations put in 565 billion yuan of liquidity to carry out the central treasury cash management deposits at commercial banks operating liquidity put 60 billion yuan. August 19 six-month period to carry out MLF operating 110 billion yuan, 3.35% interest rate, at the same time increase market liquidity and guide financial institutions to increase small and micro enterprises and the “three rural” and other key areas of the national economy and weak links support. Continue to provide long-term stability, adequate sources of funding for the development costs of the financial support shed change by PSL, 7 PSL amounted to 846.4 billion yuan at the end, an increase of 463.3 billion yuan over the beginning. The timely play of price leverage, as well as adjustments to adapt keep the benchmark lending rate, since the funds rate three times this year cut PSL to increase the shantytowns, support, promote lower financing costs. In addition, the central bank continues through agriculture, support small refinancing and rediscount support financial institutions to increase the “three rural” small and micro enterprises credit. The end of July, the balance of agriculture lending 213.9 billion yuan, an increase of 26.2 billion yuan over the previous year; supporting small balance lending 62.5 billion yuan, an increase of 25.4 billion yuan over the previous year; rediscount balance of 127.2 billion yuan over the previous year increased 11.8 billion yuan.
Next, the central bank will continue to closely monitor changes in liquidity, comprehensive use of various instruments properly adjusted combinations of liquidity, to maintain adequate liquidity and reasonable and stable operation of the money market, to guide steady moderate growth of money and credit, and promote stable and healthy economic development.
Zero hedge explains the futile attempt by the POBC trying to rescue its stock market:
(courtesy zero hedge)
With Stocks In Free Fall, China Ditches Plunge Protection For Desperation Rate Cuts
Over the weekend, the PBoC was radio silent on a highly anticipated RRR cut and the results, to say the least, were not favorable.
Gulf markets set the tone on Sunday and then from the word “go” in Shanghai on Monday morning until, well, until now, it’s been unabated selling. Selling which spilled over onto Wall Street yesterday and left the Dow down nearly 600 points at the close.
With Chinese stocks still reeling, we got a dual policy rate cut out of the PBoC first thing this morning which is interesting considering that, as Bloomberg reports, the plunge protection national team operating through China Securities Finance has apparently given up on trying to support stocks directly. Here’s whatBloomberg said earlier today:
China has halted intervention in the stock market so far this week as policy makers debate the merits of an unprecedented government campaign to prop up share prices, according to people familiar with the situation.
Some officials argue that falling stocks will have a limited impact on the world’s second-largest economy and that the costs of supporting the market are too high, said one of the people, who asked not to be identified because the deliberations are private. Officials who back intervention say tumbling shares pose a risk to the banking system, the people said.
The Shanghai Composite Index sank 15 percent over the past two days, extending a $4.5 trillion rout since mid-June that has shaken confidence among equity investors around the world. President Xi Jinping’s government is trying to balance a pledge to loosen its grip on markets against the need to maintain financial stability amid projections for the weakest economic expansion since 1990.
“From now on, the CSRC has abandoned the idea of protecting an index level – maybe it’s a sign of maturity,” one source reportedly told Caixan. “Analysts believe this episode marks the end of Beijing’s attempts to directly manage the level of the Shanghai Composite Index. Monday’s action has shattered any illusions about the government’s appetite for direct intervention,” MNI adds.
And a bit more from Bloomberg:
“Government intervention has dropped substantially,” Michelle Leung, the chief executive officer at Xingtai Capital in Hong Kong, said in e-mailed comments on Tuesday. “The reform-minded camp within the government that favors letting the market do its work seems to be driving decision making right now.”
Or perhaps not, as indicated by Tuesday morning’s desperation rate cuts.
It appears as though, on the heels of comments the CRCS made earlier this month which indicated that, although the plunge protection team would linger in the background “for years,” intervention would only come during times of extreme dislocations and stress, and while one might well be able to argue that Monday and Tuesday most certainly qualify, the global attention that China’s CNY900 in billion direct interventions have garnered looks to have left the CSF feeling gun shy.
So what’s a central planner to do?
Well, if you’re Beijing, one thing you can try is a simultaneous policy rate cut, which is exactly what we got on Tuesday morning.
Part of the aim is quite obviously to free up liquidity, which has suffered in the wake of China’s frequent open FX ops. We got still more evidence of the liquidity shortage last night when the PBoC decided to conduct CNY150 billion in reverse repos. Just last week we remarked on the extraordinary effort to inject cash via a CNY120 billion reverse repo and another CNY110 billion via medium term lending facilities (which, incidentally, the PBoC indicated it is looking to use again earlier today).
But the PBoC likely hopes it can kill two birds with two stones (to adapt the analogy). That is, by bundling a lending rate cut with the RRR cut (which the PBoC also did in June), the central bank may be trying to send a forceful message to the stock market while freeing up liquidity at the same time.
If the market gets the message (or perhaps “takes the bait” is the better way to put it), investors will take solace in the move, Chinese stocks will find their footing, and the CSF can quietly fade into the background for a while. That way, should the meltdown begin anew down the road, China can intervene directly with the national team and point to the fact that it hasn’t done so in quite some time.
So in short, the dual policy rate cut looks to be an effort to i) free up liquidity being sucked out by China’s FX interventions to support the yuan, and ii) shore up confidence in the stock market without resorting to direct purchases of equities on the part of CSF.
We suspect the effects may be short lived on both accounts because after all, aggressive easing only fuels further depreciation necessitating further liquidity-sapping FX interventions in a vicious loop (as Commerzbank’s Hao Zhou put it this morning, “the side effect of monetary easing is the depreciation pressure on CNY”), and loose monetary policy likely won’t be much comfort to China’s 90 million retail investors who now, more than ever before, are virtually guaranteed to sell any rip they can get in a desperate attempt to claw back their life savings which they naively poured into stocks back in April and May.
Why Did China Just Cut Rates, Again: Here Are Goldman’s Three Reasons
China has cut rates 5 times since November, including 4 full or partial RRR cuts since February. All those previous rate cuts did nothing to alter the downward glideslope of China’s economy which recently recorded its worst manufacturing performance since Lehman, and while the Chinese stock market benefited briefly, soaring 60% by mid-June, it had since given up all gains and was down 7% as of this morning, when the PBOC “surprised” everyone with its 5th RRR cut. The cut was not surprising – everyone had predicted it – what was surprising is that the PBOC waited until after market close on Tuesday to announce it instead of doing it over the weekend, which would have avoided a 16% rout in stocks in the past 2 days.
So why did China proceed with its latest rate cut? Short answer: because it had no other choice with everything else that it has been micromanaging so far in shambles, even if it means risking another acceleration in capital outflows but the PBOC will worry about crossing that bridge when it gets to it… in a few days.
Here is Goldman’s take:
PBOC cuts RRR and benchmark rate amid weakening economy, falling equity market and accelerating FX outflows
The PBOC has just announced that it will lower the benchmark lending and deposit interest rates by 25 bps (effective Aug 26) and the RRR (reserve requirement ratio) for all financial institutions by 50 bps (effective September 6).
Besides the cut in benchmark interest rates, the ceiling for deposit rates of time deposits of longer than one year will be removed (while the ceiling for demand deposits and time deposits of less than one year will remain unchanged). In addition to the broad RRR cut of 50 bps, an additional 50 bps cut will be applied for rural credit cooperative, rural commercial banks and village banks, and an additional 300 bps cut will be applied for financial leasing companies and auto financing companies (Our banking team estimates that total liquidity release will be around RMB 600 bn).
We believe the PBOC’s move was mainly driven by the following:
- Activity growth weakened meaningfully after a brief rebound in 2Q. July activity data were disappointing. July IP sequential growth moderated to 3% mom ann from 10% mom ann in June. While we still need hard activity data to confirm, August activity growth has probably also been weak, as reflected in the Caixin manufacturing PMI flash reading. Shutdown of factories (from August 20 to September 4) around major international events will add further downward pressures on activity growth in August and September. The official GDP target of “around 7%” this year is clearly under threat, and policy easing measures therefore must be stepped up to support growth.
- Outflows re-emerged and drained liquidity. On the back of a weakening economy and FX rate devaluation, FX outflows re-emerged in July (see China: FX outflow re-emerged in July, Aug 18, 2015) and very likely worsened in August. The PBOC needs to keep at least a steady level of liquidity supply and interbank rate. The RRR cut is therefore called for to offset the liquidity drain from FX outflows. Compared with open market operations, the RRR cut sends a much clearer message about policy intention which is much needed.
- Equity market has been falling very rapidly. As of the time of writing, SHCOMP broke the 3000 level, down 16% from last Friday. We believe this decision to cut the RRR is also partly due to the recent equity market performance.
The liberalization of the long term (above 1 year) deposit rate is another positive step in the process of interest rate liberalization. The targeted RRR cuts will release some additional liquidity but the amount is likely to be modest compared to the broad 50bps cut.
These cuts are positive moves which are much needed to support the economy and market. But they are unlikely to be sufficient by themselves. Our baseline forecast is for another 100bp of RRR cuts by the end of the year, most likely in two moves–the exact timing will be data and market dependent. Further benchmark interest rate cuts are relatively less likely compared with further RRR cuts, in our view, given policy makers’ residual worry over inflation and concerns on FX outflows, though we still have another 25bp cut in our baseline. In our view, the interbank rate needs to fall at least back to its May level (closer to 2.0% pa in terms of the 7 day repo) though the PBOC has not given clear indication about whether and when it might do it. Besides monetary policies, fiscal and administrative policy support will likely be stepped up also. We will likely see more government bond issuance, better utilization of idle fiscal deposits, more support to policy banks, and administrative measures pushing for the implementation of these policies in the near term.
the real reason that China cut its RRR: the unlocking of the rate cut provided 106 billion equivalent of yuan into the market i.e. badly needed liquidity. The POBC has spent huge amounts of money stabilizing the yuan and they needed the rate cut as a counterbalancing tool. It had nothing to do with the market fall these past few days:
(courtesy zero hedge/Soc Gen)
The Most Surprising Thing About China’s RRR Cut
Following China’s 50bps RRR cut this morning, coupled with a 25 bps easing in deposit and lending rates, there have been numerous strategist reactions, most of which suggesting what the PBOC did was in response to China’s crashing stock market and slowing economy. But mostly the market, and not so much China’s perhaps as that of Europe: moments ago Eurostoxx closed up a whopping 5.0% with the Dax soaring 5.32%. As a reminder, the German stock market has been the most punished among western bourses due to concerns trade with China will deteriorate leading to a drop in German exporter revenue and profitability.
And yet, hours before the RRR announcement, a Bloomberg note came citing “people familiar with situation ” which said that China halts intervention in stock market so far this week as policy makers debate merits of an unprecedented government campaign to prop up share prices and what to do next. The note added that some leaders support argument that stock market is too small relative to broader economy to cause crisis, adding that “leaders also believe intervention is too costly.”
So how does one reconcile China’s reported detachment from manipulating the stock market having failed to prop it up with the interest rate cut announcement this morning.
The missing piece to the puzzle came from a report by SocGen’s Wai Yao, who first summarized the total liquidity addition impact from today’s rate cut as follows “the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today’s onshore exchange rate.” And then she explained just why the PBOC was desperate to unlock this amount of liquidity: it had nothing to do with either the stock market, nor the economy, and everything to do with the PBOC’s decision from two weeks ago to devalue the Yuan. To wit:
In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.
And there is the punchline. It explains why the PBOC did not cut rates over the weekend as everyone expected, which resulted in a combined 16% market rout on Monday and Tuesday – after all, the PBOC understands very well what the trade off to waiting was, and it still delayed until today by which point the carnage in local stocks was too much. Great enough in fact for China to not have eased if stabilizing the market was not a key consideration.
In other words, today’s RRR cut has little to do with net easing considerations, with the market, or the economy, and everything to do with a China which is suddenly dumping a record amount of reserves as it scrambles to stabilize the Yuan, only this time in the open market!
The battle to stabilise the currency has had a significant tightening effect on domestic liquidity conditions. It is the PBoC’s decision whether or not to keep at it. If the PBoC wants to stabilise currency expectations for good, there are only two ways to achieve this: complete FX flexibility or zero FX flexibility. At present, the latter is also increasingly unviable, since the capital account is much more open. Therefore, the PBoC has merely to keep selling FX reserves until it lets go.
And since it can’t let go now that it has started off on this path, or rather it can but only if it pulls a Swiss National Bank and admit FX intervention defeat, the one place where the PBOC can find the required funding to continue the FX war is via such moves as RRR cuts.
SocGen makes some other key observations:
Based on our calculations, the effective RRR rate of the Chinese banking system is actually below 15%, rather than the reported headline of 18% (include the cut today). If the PBoC were to reduce the RRR quickly to a minimum level, say 5% effectively, the amount of the liquidity injection would be over CNY13tn or $2tn, which should be large enough scope for FX intervention.
It should, unless the escalation from all the other countries that have also seen their currencies tumble in value is not proportional enough to require constant intervention by China.
A question arises: just what is China selling. SocGen has an answer for that as well:
From an operational perspective, China’s FX reserves are estimated to be two-thirds made up of relatively liquid assets. According to TIC data, China held $1,271bn US treasuries end-June 2015, but treasury bills and notes accounted for only $3.1bn.The currency composition is said to be similar to the IMF’s COFER data: 2/3 USD, 1/5 EUR and 5% each of GBP and JPY. Given that EUR and JPY depreciation contributed the most to the RMB’s NEER appreciation in the past year, it is plausible that the PBoC may not limit its intervention to selling only USD-denominated assets.
SocGen’s conclusion: “In a nutshell, the PBoC’s war chest is sizeable no doubt, but not unlimited. It is not a good idea to keep at this battle of currency stabilisation for too long.”
Still, for the time being many more such RRR-cuts (and other interim reliquifications) are imminent if only for the duration of China’s FX war, with the critical distinction that the proceeds will not reach the banks, nor the economy, but remain locked in within the PBOC’s FX devaluation machinery!
Since the RRR cut is for reversing liquidity tightening and the rate cut is diluted by liberalisation, we need to monitor the development of onshore interbank rates in the coming weeks to assess whether the PBoC’s move today would amount to any net easing. It seems to us that 7-day repo rate at 2.5% is a critical line. If this rate drops below that level and remains low, then we can say with more confidence that there is monetary policy easing. If not, then more, a lot more, needs to be done.
And there you have it: while global markets received China’s announcement with their typical “a central bank just came to our reascue” exuberance, the reality is that as least today’s RRR cut will have zero impact on spurring aggregate demand, and is merely a delayed response to FX interventions that have already taken place.
Said otherwise, for China to net ease, it will have to do more, much more.
Ironically, doing so, will merely accelerate the capital outflows as a result of the ongoing plunge in the CNY, which leads to the circular logic of China’s intervention: the more it intervenes in an attempt to stabilize every aspect of its economy and finance, the more it will have to intervene, until either it wins, or something snaps.
Our money is on the latter.
Expect another rout tonight from China especially after the huge reversal of the Dow today:
(courtesy zero hedge)
This Could Be Bad News Ahead Of China’s Open Tonight
Earlier today we explained why far from supporting the stock market, all the Chinese RRR cut did was offset already used funds to support currency intervention following the August 11 devaluation: the one sentence from SocGen that put it in perspective was tthe following: “In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.”
Hence, the RRR cut was a retroactive move, not at all proactive as the market’s initial euphoria indicated.
Which, ahead of China’s close tonight, could be very bad news for those hoping for a rebound in China’s Shanghai Composite which as a reminder closed below 3000 for the first time since its bubble runup which started last July.
Here, according to Bloomberg, is the reason why:
China halts intervention in stock market so far this week as policy makers debate merits of an unprecedented government campaign to prop up share prices and what to do next, according to people familiar with situation.
Some leaders support argument that stock market is too small relative to broader economy to cause crisis, says one of the people, who asked not to be identified as deliberations are private
Leaders also believe intervention is too costly, person says.
Those who back intervention argue that market meltdown could pose danger because banks offer wealth-management products tied to market performance, people say
Government’s current priority is success of military parade set for Sept. 3 in Beijing commemorating end of World War II, people say
China Securities Regulatory Commission doesn’t immediately respond to faxed request for comment
So if the liquidity from the RRR had been already used up, and if China will not step in to prop up stocks, what will? And why is China doing this? The FT had an interestingtheory earlier today:
The China-led turmoil that has rocked global markets in the past two weeks has also shaken the ruling Communist party and left Li Keqiang, the prime minister, fighting for his political future, according to analysts and people familiar with the internal workings of the party.
Among party officials and politically connected people in Beijing, the hottest topic of conversation is whether Mr Li will take the fall for Beijing’s perceived mismanagement of the stock market crash and the country’s broader economic slowdown.
“Premier Li’s position has certainly become more precarious as a result of the current crisis,” said Willy Lam, an expert on Chinese politics at the Chinese University of Hong Kong. “If the situation worsens and if there comes a point where [President Xi Jinping] really needs a scapegoat, then Li fits the bill.”
* * *
Mr Li is already regarded by most analysts and political insiders as the country’s weakest premier in decades, thanks largely to Mr Xi’s aggressive concentration of power in his own hands.
* * *
“In any other country facing such a big crisis you would see senior officials coming out to reassure the public, but since early July no Chinese political heavyweight has come out to say what’s going on or what the government plans to do about it,” said Mr Lam. “This has fuelled speculation that there are real divisions at the apex of the party.”
Maybe Li rubbed Xi the wrong way, maybe Li just wants to put one of his own people in the premier’s shoes, maybe the two just don’t see eye to eye, whatever the reason, what matters is that Xi now has an “out” from the whole market mess: his prime minister, whom he can hand over to the furious masses to deal with as they see fit, thus washing his hands of the whole Chinese epic stock market bubble pop and moving to bigger and better bubbles.
Oh OH!! this does not look good for Saudi Arabia
(courtesy zero hedge)
For Saudi Arabia, The Music Just Stopped: Scramble To Slash Spending Begins As Oil Math Reveals Dire Picture
Over the weekend, just as Gulf state stocks were in full-on meltdown mode, we outlined Saudi Arabia’s increasingly precarious financial situation. The problem – which is at least partially of the kingdom’s own making – can be visualized as follows:
As you can see, Saudi Arabia is staring down a fiscal deficit on the order of some 20% of GDP while the country faces its first current account deficit in over a decade.
The culprit, of course, is persistently low crude prices for which Saudi Arabia can partially blame itself. As we’re fond of putting it, the country has “Plaxico’d” both itself and the petrodollar in an epic quest to bankrupt the US shale space, an effort which has been complicated by US drillers’ access to capital markets which are of course quite forgiving thanks to years of ZIRP.
Now, with declining crude revenues clashing head on with the cost of simultaneously financing the state while intervening militarily in Yemen, the Saudis are looking to tap the bond market (a move which could increase debt-to-GDP by a factor of 10 by the end of next year) and some are speculating that the riyal’s dollar peg could ultimately prove unsustainable.
So that is the backdrop and as Bloomberg reports, it’s forcing the Saudis to consider ways to cut the critical 2016 budget. Here’s the story:
Saudi Arabia is seeking to cut billions of dollars from next year’s budget because of the slump in crude prices, according to two people familiar with the matter.
The government is working with advisers on a review of capital spending plans and may delay or shrink some infrastructure projects to save money, the people said, asking not to be identified as the information is private. The government is in the early stages of the review and could look at cutting investment spending, estimated to be about 382 billion riyals ($102 billion) this year, by about 10 percent or more, the people said. Current spending on areas such as public sector salaries wouldn’t be affected, the people said.
The Arab world’s largest economy is expected to post a budget deficit of almost 20 percent of gross domestic product this year, according to the International Monetary Fund. With income from oil accounting for about 90 percent of revenue, a more than 50 percent drop in prices in the past 12 months has put pressure on the nation’s finances. The country has raised at least 35 billion riyals from local bond markets this year, the first time it has issued securities with a maturity of over 12 months since 2007.
Capital investment accounts for less than half the government’s outgoings, with current spending estimated at 854 billion riyals, according to a report issued by Samba Financial Group on Aug. 18. Saudi Arabia needs “comprehensive energy price reforms, firm control of the public sector wage bill, greater efficiency in public sector investment,” the IMF said this month. “The sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade.”
The Ministry of Finance declined to comment.
So while we’re not sure if the Saudis are open to taking advice from outside their circle of “advisers”, we offer the following observations free of charge:
- deliberately undermining a system that has worked to your benefit for years (and helped create a vast store of FX reserves) in a spiteful attempt to undercut high cost producers an ocean away might not have been the best idea
- using crude prices to achieve “ancillary diplomatic benefits” (to quote The New York Times) like forcing the Kremlin to give up Assad, is now costing a whole lot of money
- getting involved in regional proxy wars is expensive
* * *
Bonus: this is what a dual deficit problem looks like
And now onto one of our next basket cases: Brazil
(courtesy zero hedge)
Return To Junk Status “Only A Matter Of Time” For Latin America’s Most Important Economy: Barclays
Brazil’s embattled President Dilma Rousseff suffered another setback on Monday when Vice President Michel Temer elected to drop his role as Rousseff’s day-to-day liaison in Congress.
As Reuters reports, “Temer is an important ally of Rousseff and his decision will further hamstring the unpopular president, who is facing calls for her resignation or impeachment as the economy flounders.” Here’s more:
Temer’s decision is seen as a prelude to the departure of his Brazilian Democratic Movement Party (PMDB), the nation’s largest, from the governing coalition of the Workers’ Party to field its own candidate in 2018.
Valor Economico newspaper reported on Friday that the PMDB would formally announce its decision to break with the Rousseff government at a party congress on Nov. 15.
PMDB officials told Reuters the party would break with Rousseff’s coalition at some point because it plans to field its own presidential candidate in 2018, but it was not considering leaving this year. The PMDB controls both houses of Congress and its break with the government would seriously weaken Rousseff.
The move comes as the government elected to drop one in four ministries in an effort to rein in spending although, as one Sao Paulo political analyst told Reuters, “[Temer’s decision] will reinforce market worries about the government’s ability to execute economic policies.”
Those worries come as the country struggles to cope with both fiscal and current account deficits and a nasty bout of stagflation, all of which we’ve discussed at length. Visually, the problem looks like this:
The political and economic turmoil (with the latter punctuated by a horrendous unemployment print for July) couldn’t come at a worse time.
The country sits at the center of the global EM unwind and between the uncertainties surrounding the government’s ability to implement austerity combined with the pain from falling commodity prices and sluggish demand from China, there are now very real questions about how long the country can maintain its investment grade rating.
Here’s Barclays with more:
The global and domestic environments have soured, and the clock is ticking for Brazil to prove its creditors that it still belongs to the investment grade club. The Fed is about to embark on policy normalization that should, albeit gradually, put the period of easy dollar funding behind us. China seems to be accepting the inevitable fact that its large economy is structurally slowing and has so far resisted fighting the slowdown with fiscal stimulus as it did in the past. Commodity prices have been responding to this new outlook for some time, and they now look particularly vulnerable following China’s recent steps.
For Brazil, the global backdrop, while still better than during most of its history, feels hostile relative to the one it faced in its recent past.
As they should, excesses have been exposed by tough times; however, this time, policy mismanagement likely carries more blame than complacency to the now gone good times. Brazil’s fiscal slippage accelerated ahead of the elections (Figure 1), in line with most of LatAm’s well-documented historical pattern. To varying degrees, most observers were not surprised by the Rousseff administration’s decision to boost spending before the polls. The surprise, instead, was how it handled it after winning the election.
The Petrobras corruption scandal eroded what was left of President Rousseff’s already damaged political goodwill.
This backdrop has left the country in a recession, its fiscal accounts shaky and consumer sentiment depressed. Latent social unrest may deprive the already weakened administration of the vigor needed to keep the country from losing its hard-earned investment grade rating.
The country is at a crossroads and markets are taking note. With the economy contracting and the central bank raising rates, 2y inflation breakevens are receding from recent highs. At the same time, however, long-dated breakevens are creeping up, likely a sign of rising fiscal concerns. Markets may be pricing risks that Brazil’s challenging fiscal dynamics could end up being monetized (Figure 2).
Doubts about the fiscal plan are thus raising questions of whether the central bank will remain committed to honor its inflation target at all times. The central bank, which is not independent, will be left between a rock and a hard place. On one hand it will be tempted to ease rates to support its battled economy as soon as near-term inflation and expectations stabilize. On the other, it will have to keep a hawkish eye on long-dated breakevens to avoid worsening credibility concerns.
* * *
The takeaway: “We conclude that, under current circumstances, it is only a matter of time until Brazil loses its investment grade status.”
Or, summed up in a picture:
Brazil’s Economy Is Now A Job Destruction Machine
In more ways than one (or two, or three) Brazil is the poster child for the global emerging market unwind that, thanks to China’s yuan devaluation, has accelerated dramatically over the course of the last week.
To be sure, the combination of slowing demand from China, the (now lower) possibility of a Fed rate hike, and, perhaps most importantly, the end of the commodities supercycle which has seen prices crash to theirlowest levels of the 21st century, would be more than enough to put Latin America’s most important economy into a tailspin.
But unfortunately, a political crisis stemming from allegations of fiscal book cooking and corruption charges tied to Petrobras where President Dilma Rousseff was chairwoman for seven years have exacerbated the country’s woes and recently, Brazilians went (back) to the streets by the hundreds of thousands to call for Rousseff’s impeachment.
The fallout for the real economy has been catastrophic and indeed Brazilians suffered through the worst growth-inflation outcome (i.e. stagflation) in over a decade during Q2. Whether or not Rousseff can survive (politically speaking, we hope) and whether or not the government can hit primary fiscal surplus targets is an open question, but as we noted on Thursday, the populace is under tremendous pressure in the meantime with unemployment rising for a seventh consecutive month and soaring to its highest level in half a decade in July.
On that note, we bring you the following chart and commentary from Barclays which underscores precisely what we said last month, namely that Brazil may well be in the midst a depression:
In July, 157,905 jobs were eliminated in Brazil, compared to the creation of 11,796 positions in July 2014, according to data from CAGED, Brazil’s employment register. Year-to-date, 547,738 job positions have been eliminated (versus the creation of 504,914 jobs in the same period of 2014). In seasonally adjusted terms, today’s print is compatible with 140,939 job eliminations, pretty close to the historical low of -154,355 in June (Figure 1).
Sector-wise, the industrial and retail sectors accumulate the largest job eliminations, which together sums up to 454k. The construction sector follows with a job destruction of 152k, and the only positive highlight is the agricultural sector, which created 99k formal jobs (Figure 2).
The magnitude of the deterioration of the labor market continues to surprise in Brazil. This week the unemployment rate rose by the fastest pace in the historical series, with the data showing that even more people are looking for job positions, however without finding them (see Brazil unemployment rate: Increased pace of deterioration).
The consequence of this is an even more prolonged recession, as disposable income falls and household consumption contracts. Coupled with business confidence indexes for August showing further drops to minimum-lows, this suggests that the worst in terms of growth is still ahead of us.
Which means that BofAML is exactly right to say that out of all the charts one cares to examine for Brazil, the most important one may ultimately be this:
Half Of Emerging Market Stocks Are Now In Bear Territory: The Map
We have, over the past two weeks, spent quite a bit of time documenting the veritable collapse of EM stocks, bonds, and FX in the wake of China’s move to devalue the yuan.
The yuan deval effectively telegraphed Beijing’s concerns about the economy, confirming fears that the situation was worse than the NBR is willing to admit and putting further pressure on commodity prices which are now sitting at their lowest levels of the 21st century.
Now, with EM in turmoil from Brazil to Malaysia, Bloomberg is out with the following map which sums up the carnage by showing just how many EM equity markets are in or closing in on bear market territory.
Euro/USA 1.1504 down .0076
USA/JAPAN YEN 120.08 up 1.197
GBP/USA 1.5772 up .0014
USA/CAN 1.3202 down .0083
Early this Tuesday morning in Europe, the Euro fell by a huge 76 basis points, trading now just above the 1.15 level falling to 1.1504; Europe is still reacting to deflation, announcements of massive stimulation, a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, an imminent default of Greece and the Ukraine, rising peripheral bond yields, and flash crashes and another Chinese currency devaluation, and blood letting Asian bourses. Last night the Chinese yuan weakened a considerable .0087 basis points for its 5th devaluation.
In Japan Abe went all in with Abenomics with another round of QE purchasing 80 trillion yen from 70 trillion on Oct 31. The yen now trades in a southbound trajectory as settled down again in Japan up by 120 basis points and trading now just above the 120 level to 120.08 yen to the dollar,
The pound was down this morning by 14 basis points as it now trades well above the 1.57 level at 1.5772.
The Canadian dollar reversed course by rising 83 basis points to 1.3202 to the dollar. (Harper called an election for Oct 19)
We are seeing that the 3 major global carry trades are being unwound. The BIGGY is the first one;
1. the total dollar global short is 9 trillion USA and as such we are now witnessing a sea of red blood on the streets as derivatives blow up with the massive rise in the rise in the dollar against all paper currencies and especially with the fall of the yuan carry trade. The emerging market which house close to 50% of the 9 trillion dollar short is feeling the massive pain as their debt is quite unmanageable.
2, the Nikkei average vs gold carry trade (blowing up)
3. Short Swiss franc/long assets (European housing/Nikkei etc. This has partly blown up (see Hypo bank failure).
These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>
The NIKKEI: this Tuesday morning: down by 733.98 or 3.96%
Trading from Europe and Asia:
1. Europe stocks all deeply in the green
2/ Asian bourses mostly in the red … Chinese bourses: Hang Sang green (massive bubble forming) ,Shanghai red (massive bubble ready to burst), Australia in the green: /Nikkei (Japan)red/India’s Sensex in the green/
Gold very early morning trading: $1149.80
Early Tuesday morning USA 10 year bond yield: 2.07% !!! up 7 in basis points from Monday night and it is trading well below resistance at 2.27-2.32%
USA dollar index early Tuesday morning: 93.98 up 56 cents from Monday’s close. (Resistance will be at a DXY of 100)
USA/Chinese Yuan: 6.4112 up .0084 ( Chinese yuan down 8.4 basis points)
“Biggest Rally Of 2015” Crashes Into Biggest Reversal Since Lehman
Did you drink the Kool-Aid?
It appears not everyone did… The first 6-day losing streak for the S&P 500 since July 2012…
The S&P 500 has gapped up +3% and closed down on the day only once since the inception of the futures, 10/16/08 (h/t @sentimenttrader)
Call that a bounce-back…?
Across asset-classes the last 2 days have been ‘eventful’ to say the least…
The Dow is down almost 700 points from the post-PBOC highs!!!
Stocks bounced, half-heartedly… but Nasdaq was on target for its best day of the year… (and best since the first trading day of 2013’s meltup) before they puked it all back in the last hour…
Cash indices remain red on the week as once again Nasdaq was driven up to unchanged before the selling pressure resumed..
While we are well aware of the ‘hope’ priced into this rebound, the actual gains from the China rate cut
None other than Eric Hunsader summed it all up perfectly…
What was really driving stocks today was simple – USDJPY fun-durr-mentals…
Utes were worst today (as rates soared) and Tech remains the winner on the week – though all S&P sectors are under water…
Still financials did not look overly excited…
Treasury yields were battered higher today – biggest rise in 10Y yields (13bps) since Feb 2015…the late-day selloff in stocks put a modest bid into bonds… We can’t help but wonder if this move is rate-lock-buying ahead of panic-last-minute corporate issuance before rates go up in Spetember
The US Dollar was bid as EUR weakened but JPY was critical…
Commodities were mixed with crude and copper bouncing back in anticipation and comfort at the rate cut as PMs dumped as the USD levitated…
Case-Shiller Home Prices Dip In June, Miss For 3rd Month In A Row
Home prices rose 4.97% YoY in June, according to Case-Shiller’s 20-City index, missing expectations for the 3rd month in a row. Price appreciation has now been flat for 5 months – despite surging home sales – as bubblicious San Francisco saw price depreciation once again. Portland amd Denver saw the most appreciation in June. This is the second month in a row of sequential seasonally-adjusted declines in home prices, and along with TOL’s dismal report this morning, suggests maybe another pillar of the ‘strong’ US economy meme is being kicked out… and Case-Shiller warn more than one rate hike by The Fed (or a stock market plunge) will stymie housing considerably.
Home price growth stagnates, misses again…
As Case-Shiller explain,
“Nationally, home prices continue to rise at a 4-5% annual rate, two to three times the rate of inflation,” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “While prices in San Francisco and Denver are rising far faster than those in Washington DC, New York, or Cleveland, the city-to-city price patterns are little changed in the last year. Washington saw the smallest year-over-year gains in five of the last six months; San Francisco and Denver ranked either first or second of all cities in the last five months. The price gains have been consistent as the unemployment rate declined with steady inflation and an unchanged Fed policy.
“The missing piece in the housing picture has been housing starts and sales. These have changed for the better in the last few months. Sales of existing homes reached 5.6 million at annual rates in July, the strongest figure since 2007. Housing starts topped 1.2 million units at annual rates with almost two-thirds of the total in single family homes. Sales of new homes are also trending higher. These data point to a stronger housing sector to support the economy.
Two possible clouds on the horizon are a possible Fed rate increase and volatility in the stock market.
A one quarter-point increase in the Fed funds rate won’t derail housing. However, if the Fed were to quickly follow that initial move with one or two more rate increases, housing and home prices might suffer.
A stock market correction is unlikely to do much damage to the housing market; a full blown bear market dropping more than 20% would present some difficulties for housing and for other economic sectors.”
Perhaps indicating just how fragile all of this really is.
Richmond Fed manufacturing collapses to its low for the year. It has dropped the most in this reading in almost 9 years:
(courtesy Richmond Fed/zero hedge)
Richmond Fed Manufacturing Collapses To 2015 Lows, Drops Most In 9 Years
The 3-month bounce in the Richmond Fed Manufacturing survey… is dead. From 13 in July, August saw it collapse to 0 (massivley missing expectations of a 10 print). This is the biggest absolute drop in the index since May 2006. Across the board, underlying factors crashed with Shipments plunging, New Orders cliff-diving, order backlogs disappearing and Capacity Utilization plunging. This is exactly what we would expect after a massive inventory build up that was not accompanied by a surge in sales… but the pundits stil proclaim “no signs of an imminent US recession.”
Third: US PMI Services also sliding back towards its lows for the year:
US Services Economy “Momentum Shifts Down A Gear”, Slides Back Towards 2015 Lows
August’s preliminary Services PMI was slightly better than expected but dipped from 55.7 to 55.2 – back towards the lowest levels of 2015. Under the surface things do not look great with New Business Volumes at their weakest since January amd Prices Charged tumbling to the lowest level since June 2013. As Markit notes, “underlying momentum within the U.S. economy had shifted down a gear even before the recent global market turmoil and escalating worries about China’s growth outlook gathered on the horizon.”
“August data signals a renewed slowdown in U.S. service sector growth, and this comes hot on the heels of a 22-month low recorded by the latest flash Manufacturing PMI survey. Moreover, service providers’ new business volumes expanded at the slowest pace since January, suggesting that underlying momentum within the U.S. economy had shifted down a gear even before the recent global market turmoil and escalating worries about China’s growth outlook gathered on the horizon.
“Job creation nonetheless continued at a solid pace in August, which marked five-and-half years of sustained employment growth across the service economy. Meanwhile, the latest survey highlighted a further slowdown in input cost inflation, as falling fuel prices continued to alleviate pressures on cost burdens. Average prices charged by service sector firms were broadly unchanged in August, thereby ending a 25-month period of rising output prices.”* * *
US Consumer Confidence Is Both The Highest & Lowest In 2015 Depending On Who You Ask
According to the government-sponsored Conference Board, US Consumer Confidence soared from 91.0 to 101.5 – 2015 highs – in August.
Acording to non-government-sponsored Gallup, US Consumer’s Economic Outlook collapsed to its lowest in a year.
The Conference Board data is driven by a surge in Present Situation from 104 to 115.1 – its highest in the cycle – as it appears higher gas prices, tumbling stocks, and a China meltdown means everything is awesome!! Which is odd because Plans To Buy A Home, Auto or Major Appliance all tumbled.
As Gallup explains,
this latest average was the result of 37% of Americans saying the economy is “getting better” and 58% saying it is “getting worse.”
The situation in China may continue to reverberate in the U.S., with U.S. stocks closing much lower on Monday and European markets starting the week with large drops. To the extent stock markets continue to suffer, particularly if this affects broader aspects of the economy, Americans’ confidence could be shaken further in the coming week.
Charts: Gallup and Bloomberg
Zero hedge explains the lies offered by HFT as to what really happened yesterday:
Cutting Through The HFT Lies: What Really Happened During The Flash Crash Of August 24, 2015
One of the fallacies being propagated about yesterday’s flash crash, is that somehow HFTs came riding in as noble white knights and rescued the market from a collapse instead of actually causing it. This particular lie is worth a few quick observations and explanations of what really happened.
What did not happen, is what Doug Cifu, the CEO of HFT titan Virtu, the firm which as we have profiled repeatedly in the past has lost money on 1 day in 6 years…
… told CNBC when he said it wasn’t Virtu’s fault the market did not work for anyone as a result of countless HFT glitches: “we don’t cause volatility, as a market maker we’re absorbing volatility and we think we soften it.”
The most amusing bit was when Cifu said that “we’re really just in the role of transferring risk from natural buyers to natural sellers.” Considering Virtu and its “special sauce” has never actually taken on risk with its trading record, discussing risk is a little rich for the owner of the Florida Panthers, and here’s why: in a note by Credit Suisse’s Laura Prostic (the typos are because she is in S&T) we now know precisely what happened:
HFT is typically 50% of overall volm, but they have to walk away in this heightened vol envt, which dramatically reduces liquidity. Hightened vol was mainly unwinding of hedges, not panic.
Anyone who actually trades (and is not part of the Modern Market initiative) knows that this precisely what happens every time there is a spike in market vol: HFTs simply walk away leading to the dreaded “HFT STOP” moment, creating a feedback loop of even less liquidity, and even more volatility, until circuit breakers are finally hit or asset prices hit limits. Yesterday, for the first time in history, not only the S&P500, but the Nasdaq and the DJIA all hit their particular “limit down” triggers.
Credit Suisse also directly refutes what Doug Cifu said: HFTs, far from not causing volatility, merely step aside when volatility surges thus leading to such stunners as VIX soaring above 50 overnight (with the CBOE too ashamed to even report what it would have been in the first 30 minutes of trading).
This also ties in with the summary in our last night’s post comparing the flash crashes of 2010 and 2015:
The good news is that with liquidity inevitably collapsing ever further to a state of near singularity with ongoing central bank interventions, and with markets broken beyond repaid, we will very soon have a repeat flash crash like today, one which will provide enough satisfactory answers to the question of just happened that lead to a market that was completely broken for nearly an hour, and where the VIX was so very off the charts, the CBOE was afraid to show it for at least thirty minutes.
One thing is certain though: while the market dies a slow, painful, miserable death, the biggest HFTs will continue pocketing millions. Such as Virtu: “Virtu Financial Inc., one of the world’s largest high-frequency trading firms, was on track to have one of its biggest and most profitable days in history Monday amid a tumultuous 24 hours for world markets, according to its chief executive.”
As we previously reported, while Virtu may have fabricated its role in yesterday’s events, there was one truth: it had an amazingly profitable day because as a result of the total chaos, HFTs were able to frontrun block orders from a mile away and as a result of soarking bid/ask spreads, Virtu raked in millions by simply capitalizing on the chaos it and its peers have created. As Cifu said then “Our firm is made for this kind of market.” We quickly corrected him: “your firm made this kind of market.”
But back to the lies: earlier today the WSJ reported the following:
The speed and depth of the drop harked back to the flash crash of May 2010, when program-driven trading produced a self-reinforcing wave of selling. This time around, high-frequency trading firms like Virtu Financial Inc. and Global Trading Systems LLC were buyers that helped U.S. stocks rebound midday from their early slump.
“We were catching those falling knives,” said Ari Rubenstein, co-founder of Global Trading Systems.
Actually no. What happened is that in early trading the entire market was in freefall, and the only thing that saved it was the various major market indices hitting their limit down levels for the first time in history – not even during the Flash Crash of 2010 did this happen. The following Nanex chart documents this beyond a doubt.
If HFTs did anything, it was merely to frontrun the buy orders once the selling wave – halted thanks to limit downs being hit – had exhausted itself, and the buying scramble was unleashed around 9:35am leading to a 5% move in less than 10 minutes! It was here that Virtu made its colossal profits, however not from taking the least amount of risk, but merely from frontrunning order flow into a still chaotic market with gargantuan bid-ask spreads, which incidentally not only does not provide liquidity, but reduces it as it competes with other buy offers for any market offers, also known as “providers” of liquidity, only to immediately flip the transaction to those buyers which Virtu knew with 100% certainty were just behind it. In any other market this would be illegal, except for one in which Reg NMS has made such frontrunning perfectly legal (courtesy of billions spent by the same HFTs who now benefit from it).
So what was the real contribution of HFTs: an unprecedented failure of ETFs to trade with their underlying securities and vice versa. As we said yesterday: “for minutes at a time, there was an unprecedented disconnect in ETF fair value as hedge funds sold off ETFs however correlation arbitrageurs were unable to capitalize on the discrepancy with the underlying leading to historic, and extremely lucrative divergences.”
… experts are still scratching their heads over what may have caused these ETFs to nosedive. One possible explanation is that liquidity providers — think high-speed traders and other Wall Street firms — charged with stabilizing the market weren’t there when needed. That’s what happened during the flash crash of 2010. “When markets get hairy, sometimes those liquidity providers step out of the way to avoid getting run over,” said Matt Hougan, CEO of ETF.com.
So while we await for the first clear break of the ETF model, thanks to none other than HFTs, here is a visual example of what really happened: some 220 ETFs which all fell by 10% yesterday!
But it wasn’t just the “transitory” failure of the ETF model: yesterday the Nasdaq ETF, the QQQ, had itswidest 1 minute price swing in history. Yes, the NASDAQ!
And just in case there is still any confusion if yesterday’s event was indeed a flash crash, the answer is yes, most certainly, as can be seen by the 15% tumble in QQQs right at the open. That, ladies and gentlemen, is the definition of a flash crash.
Again: thank you HFTs.
With that we leave matters into the SEC’s capable hands which we know will do absolutely nothing until the time comes when the next marketwide crash does not see a promptly rebound, and the time to finally point the finger at the HFTs comes. It’s just a matter of time, plus someone has to be a scapegoat for the real, and biggest, market manipulator in history: the Federal Reserve.
And since, naturally, the complicit and corrupt SEC won’t do anything, expect another wave of retail investors to drop out of the market forever and to never come back, having seen yet again what a truly broken and rigged casino it has become.
Finally, while we are delighted that firms like Virtu make outside profits on days in which the market crashes and leads to untold losses for retail investors, we have just one simple request – please don’t take us for fools anymore: by now everyone knows all of your tricks, and can see right through your bullshit.
So, dear Virtu, frontrun whoever you have to, other HFTs, hedge funds, mutual funds, or whoever else is left in this quote-unquote market, and have another Madoff year (one with zero trading losses) but you will have to do it without what was once called the “investing public.” They are now permanently gone until two things happen: i) the market is once again a market, not artificially propped up by $14 trillion in central bank liquidity which makes every asset “price” a illusion, and ii) HFT frontrunning is no longer legal, endorsed and blessed by the SEC, the regulators and all law enforcement agencies.
Wee! This is becoming a weird form of time travel.
Twenty-five trading days ago the S&P 500 was just 0.1%below its all-time high of 2131 recorded on May 21. Since then we have traveled backwards about 415 days!
Do not fret, however. Beijing has called in the Red Cavalry—otherwise known as the PBOC.
In standard central bank fashion, the latter injected (even) moar credit into the Chinese economy via a 25 bps rate cut, reduction of bank reserve requirements by 50 bps and mainlining about $25 billion directly into the banks via reverse repos. Under the latter procedure, the PBOC takes collateral and gives banks cash for a few weeks and then rinses and repeats—over and over, for as long as it takes.
Of course, in recent weeks China’s officialdom has also been feverishly trying to prop-up its currency in order to forestall a tsunami of capital flight. In the last six quarters more than $800 billion of private capital outflows had Beijing scared silly. They were actually sending the paddy wagons out to arrest people for attempting to sneak their capital out of the land of red capitalist miracles.
In fact, according to Soc Gen today’s PBOC actions will inject about $106 billion of fresh cash into the banking system, including bank reserves freed up by the RRR cut. Apparently, however, during recent weeks China had drawn down its FX reserves in attempting to prop-up the yuan by an even greater amount. That means they drained the banking system first, and have now flushed the same liquidity back in.
Push, pull. Tighten, ease.
These are acts of desperate, stupid madness, and here’s why.
Twenty-five years ago, Mr. Deng discovered the printing press in the basement at the PBOC and let it rip——including a 60% devaluation of the RMB in one fell swoop. Soon the world was flooded with cheap Chinese goods.
As its subsequent giant trade surpluses materialized, however, rather than letting the exchange rate rise in a clean float as Nixon and his guru, Milton Friedman, had prescribed when they trashed Bretton Woods back in August 1971, the communist bosses in Beijing ran the dirtiest float ever conceived.
During the last two decades the PBOC and its sovereign wealth management affiliates accumulated dollar, euro and other major currency reserves like there was no tomorrow. But as they stuffed the PBOC’s vaults with $4.2 trillion of US treasury notes, Fannie Mae paper and other so-called FX reserves in the conduct of their currency pegging operation, they perforce expanded their domestic banking and credit system by an equivalent amount of RMB.
At length, the suzerains of Beijing turned China into a credit-fueled house of cards. In the short time of two decades, they morphed a debt-free, quasi-subsistence federation of communes, collectives and state factories into a $28 trillion mountain of IOUs that funded the greatest spree of economically mindless land grabs, construction spending, economic gambling and state corruption in recorded history.
In other words, China is a tottering freak of economic nature. But never mind the deformed foundation upon which the miracle of red capitalism was erected. The Wall Street brokers nearly without exception view it as just one more big economy that can be continuously inflated by deft central bank intervention and other state actions designed to insure stability and growth.
As Nixon might have said, they are all Keynesians now. The job of central banks everywhere and always is to goose trouble-prone economies with printing press money so that households and business will spend more, the GDP will rise more and the stock bourses will be worth more.
Under this regime, there is no reason why economies should ever falter or stock markets should tumble; the state and its central banking branch can purportedly cure any deviations.
Thus, on July 7th Goldman’s China equity strategist gave the all clear signal right after the proceeding 20-day, $3.5 trillion meltdown of the China stock market. Completely ignoring the fact that China’s newly affluent classes have opened 287 million trading accounts, mostly in recent months, and mostly amounting to highly margined table stakes at its red chip casinos, Goldman saw nothing but blue skies ahead:
Goldman Sachs Says There’s No China Stock Bubble, Sees Rally
Kinger Lau, the bank’s China strategist in Hong Kong, predicts the large-cap CSI 300 Index will rally 27 percent from Tuesday’s close over the next 12 months as government support measures boost investor confidence and monetary easing spurs economic growth. Leveraged positions aren’t big enough to trigger a market collapse, Lau says, and valuations have room to climb.
Goldman Sachs is sticking with its optimistic forecast in the face of record foreign outflows, the biggest-ever selloff by Chinese margin traders and a chorus of bubble warnings from international peers. The call hinges on the success of unprecedented government efforts to revive confidence among individual investors who watched equity values tumble by $3.2 trillion over the past three weeks……“It’s not in a bubble yet,” Lau said in an interview. “China’s government has a lot of tools to support the market.”
Well, not exactly. The Shanghai composite is down 21% since then, and a staggering 43% from the levels attained in late March. That amounts to a $4 trillion “wealth” implosion in less than 100 trading days.
Did Goldman fire this clown yet? No it didn’t.
Why? Because Goldman’s house economic model is essentially statist, and its agents——Dudley at the Fed, Carney at the BOE, Draghi at the ECB—–are strategically placed to execute that model.
So not surprisingly, Goldman’s chief equity strategist is out this morning with a buy-the-dip note, assuring its clients that the storm is over and that the S&P 500 will be back to its old highs in a jiffy:
…….Concern about China economic growth was the immediate catalyst for the correction. (But) we expect the US economy will avoid contagion and continue to expand. S&P 500 will rise by 11% to reach 2100 at year-end. Such a rebound would echo the trading pattern exhibited in 1998 when US equities rallied and largely ignored the Asian financial crisis. ………
Ultimately, the US economy was relatively unaffected by overseas financial market gyrations in 1998 and we believe a similar situation will occur in 2015. Our analysis of the geographic revenue exposure of S&P 500 constituents reveals that the US accounts for 67% of aggregate sales. Approximately 8% of revenues stemmed from the Asia-Pacific region with 1% disclosed as coming specifically from Japan and 2% from China. From an economics perspective, US exports account for roughly 13% of total US GDP, which includes 5% to emerging markets and less than 1% to China.
That is just plain gibberish. Goldman’s statist economic model renders it utterly blind to the booby-traps planted everywhere in the world economy. For goodness sakes, this is not 1998!
Back then China had less than $2 trillion of debt outstanding and a minor presence in the world economy. Since then its credit market debt outstanding has exploded to $28 trillion, its steel industry has expanded by 6X, its auto sales by 25X and its exports have risen by 1300%.
In the interim, in fact, it has paved its landscape with a vast excess of everything——60 million empty high rise apartments that function as piggy-banks for speculators; dozens of ghost cities, empty malls and see through office buildings; scores of steel, machinery and auto plants that will soon be shutdown; mountains of copper and iron ore inventories that are hocked to foreign lenders; and trillions worth of high speed rails that are unsafe, airports that have no traffic and roads and bridges to nowhere.
This did not happen in isolation behind a red curtain. The wild west boom of red capitalism now sucks in $2 trillion more per year of imports of energy, raw materials, intermediate components, capital equipment and luxury goods than it did in 1998 when Alan Greenspan panicked in the face of the LTCM meltdown and slashed interest rates three times.
Indeed, Greenspan’s foolish action triggered a spree of coordinated money printing by the worlds central banks, including the PBOC, that was literally unimaginable by even the most wild eyed Keynesian economist at the time Goldman now identified as pivotal to our current prospects.
To wit, the combined central banks of the world sported a collective balance sheet of less than $2 trillion in September 1998—–reflecting a century’s worth of slow and steady build-up. Today that figure is $22 trillion, meaning that the world economy has been hyper-stimulated by a 11X increase in high powered central bank credit.
It is downright foolish, therefore, to claim that the US economy is decoupled from China and the rest of the world. In fact, it is inextricably bound to the global financial bubble and its leading edge in the form of red capitalism.
It might be wondered how stupid Goldman believes its mullet clients actually are. With respect to its non sequitir that China accounts for only 1% of US exports would it not occur to a reasonably alert observer that Caterpillar did not export its giant mining equipment to China; it went there indirectly by way of Australia’s booming iron ore provinces.
Likewise, the US did not export oil to China, but China’s vast, credit-inflated demand on the world market did artificially lift oil prices above $100 per barrel, thereby touching off the US shale boom that is now crashing in Texas, North Dakota, Oklahoma and two other states. And is it not the fact that every net new job created in the US since 2008 is actually in these same six shale states?
Similarly, US exports to Europe have tripled to nearly $1 trillion annually since 1998, while European exports to China have more than quintupled. Might there possibly be some linkages?
Never mind the obvious, however. All the brokers were out this morning with the decoupling story—–even if it ending up insufficient to prevent another down day in the market.
But let’s see. According to the Wall Street brokers housing and employment will carry the US economy steadily upward.
Really? In the face of an unprecedented collapse of the greatest phony boom known to economic history, here is housing and labor hours employed in the US economy.
I will see you tomorrow night