With Chinese equities tumbling in the face of PBOC's liquidity withdrawal (record spike in o/n HIBOR) and short-squeeze of CNH shorts (and carry traders), the sell-side is as confused as a CNBC anhcor at what is good and what is bad. UBS urges investors not to sell while JPM fears a structured-product-driven vicious cycle between EM and Chinese equities. Following a record-breaking surge in offshore Yuan against the USD (12 handles top to bottom) during the US session, selling has resumed into the fix. "Expectations the yuan will depreciate sharply should be seen as ridiculous and humorous," warned one Chinese official (who obviously did not get the memo of the last 3 weeks) as The PBOC injected CNY80bn and decided for the 3rd day in a row to hold the Yuan fix unchanged.
As we begin tonight's "trading", Chinese equities are deep in the red YTD:
- *SHANGHAI MARGIN DEBT BALANCE DECLINES MOST IN FOUR MONTHS
"Expectations the yuan will depreciate sharply should be seen as ridiculous and humorous," warned one Chinese official (who obviously did not get the memo of the last 3 weeks)...
- *PBOC TO INJECT 80B YUAN WITH 7-DAY REVERSE REPOS: TRADER
- *CHINA KEEPS YUAN FIXING LITTLE CHANGED FOR THIRD DAY
- *SHANGHAI MARGIN DEBT BALANCE DECLINES MOST IN FOUR MONTHS
Offshore Yuan is selling back down a little after an epic day of squeezing...
Meanwhile, away from the actual dynamics of tonight's early moves, mixed messages from a desperate sell-side tonight with UBS proclaiming:
- INVESTORS SHOULDN'T SELL CHINESE STOCKS AT THESE LEVELS: UBS
And JPMorgan warning of a vicous cycle of selling between China and EM equities:
Events in Chinese equity markets feel uncomfortably close to the June-August sell-off.
The Shanghai and Shenzhen indices are down 15% and 20%, respectively, in the first six trading days of 2016. MSCI China, EM and World are down 11%, 9% and 7%, respectively. Onshore investors’ confidence in the local policy is weak. Shorting of H-share futures increased when A-share circuit breakers kicked in. If HSCEI moves below 8000 (spot 8505) then we approach structured product strikes leading to H-share futures selling. To add to the discomfort, the CNH overnight rate spiked to 23% as aggressive PBoC intervention results in a shortage of offshore renminbi. Finally, the market was disappointed that post the record decline in FX reserves, there was no RRR cut.
Simply the market is unsure on policy and is technically weak, driving EM toward our bear case end 2016 target of 720.
Wondering why we care about China? Here's one reason... US and Chinese stocks are extremely correlated since The Fed slowed and then stopped its money-printing... (and that correlation has increased since August and The Fed's September "fold")
The jawboning started early
- *YUAN FALL TO STIMULATE CHINA'S EXPORTS: SECURITIES JOURNAL
which is entirely incorrect...
And then this:
- *EXCHANGE RATE NOT DETERMINING FACTOR FOR EXPORTS: SEC. JOURNAL
Confused?
And finallyu there is this:
- *PBOC'S ZHOU ATTENDS BIS MEETING
In other words - they are starting to coordinate!! Against The Speculators? Or The Fed?