Three days after Chinese stocks suffered their biggest plunge in 7 years, the bubble euphoria is back and laying ruin to the banks’ best laid plans that this selloff will finally be the start of an RRR-cut, after China’s habitual gamblers promptly forget the market crash that happened just 48 hours ago and once again went all-in, sending the Shanghai Composite soaring most since October 9, 2009, which gained 4.7% overnight after yesterday’s 1.8% gain, led by financials and energy stocks with the biggest contributors being PetroChina +7.3%, Bank of China +9.9%, ICBC +6%, China Life +10%, Agbank +5.6%. The rebound means that after plunging and soaring in just about 72 hours, Chinese stocks are almost unchanged for the week, even though the 10-day volatility has surged to the highest since 2008. The reason for the surge: certainly not China’s weakest GDP in 24 years, or renewed hopes for more rates cutes, but a report by Sina yesterday that China’s central bank rolled over medium-term lending facility to Industrial Bank and Shanghai Pudong Development Bank. In other words, as China takes away from margin trading with one hand, it continues to provide “stealth QE” to China’s banks with the other.
That this won’t end well is confirmed by the fact that the PBOC itself is now very much in the western central bank camp and is utterly clueless about not only what it is doing but what it will do:
- PBOC HAS NO INTENTION TO PROVIDE TOO MUCH LIQUIDITY: ZHOU
It wasn’t just China that appears confused: so is the BOJ whose minutes disappointed markets which had been expecting at least a little additional monetary goosing from the Japanese central bank involving at least a cut of the rate on overnight excess reserves, sending both the USDJPY and US equity futures lower. Per Reuters: “The yen rebounded against the dollar on Wednesday after the Bank of Japan stood pat on monetary policy, as speculators who had anticipated more easing covered their short yen positions. The BOJ refrained from expanding its bond-buying stimulus programme, opting instead to expand loan schemes aimed at boosting lending. It also cut its inflation forecast to 1.0 percent from 1.7 percent in the wake of slumping oil prices.” This is a problem which as we will show in a subsequent post citing Goldman, means that suddenly Kuroda is flirting dangerously close with also being SNBed and losing the market’s confidence.
More details: The BoJ retained its plan for JPY 80trl annual rise in monetary base and lowered CPI forecasts as expected. The BoJ also expanded growth support funding facility by JPY 3trl to JPY 10trl and stimulating bank lending facility by 1yr as expected. Surprisingly, the BoJ was upbeat on the economy lifting 2015/16 real GDP forecasts. Nevertheless, today’s decision disappointed, with the derivatives markets pricing in some expectations for a more aggressive action including cutting of the IOER, ahead of the release which BoJ Kuroda said was not discussed. The Nikkei closed lower by 0.5%.
Finally, in the easter egg department, with the much-anticipated ECB announcement just 24 hours away, none other than the ECB’s Ewald Nowotny threw a glass of cold water in the faces of algos everywhere when he said that tomorrow’s meeting will be interesting but one “shouldn’t get overexcited about it.” He said that he saw low inflation rates but did not expect deflation. Nonetheless, inflation developments need to be monitored closely, Nowotny said. Is it possible that with more than 100% of ECB QE priced in and every pundit betting the kitchen sink it is inevitable, that Mario Draghi still doesn’t have the needed consensus and will disappoint tomorrow? If so, watch out for some serious fireworks as even more macro hedge funds blow up.
In Europe equities (Eurostoxx50 -0.02%) are off the lows of the session,
however the continental exchanges have underperformed on position
squaring ahead of the ECB tomorrow. The FTSE 100 (+0.8%) has remained
stable which has helped it to outperform its mainland European peers.
In the UK, BoE minutes surprised the market as the MPC voted 9-0 vs. Exp. 7-2, with previous dissenters McCafferty and Weale changing their views due to weak inflation data. This caused GBP/USD to fall 72 pips to break below 1.5100, gilts to rally 36 ticks and the short sterling strip moved 6 ticks higher. However it wasn’t quite enough to shift rate hike expectations and the market still expects the first rate hike in Q1 2016. The minutes completely overshadowed the UK jobs report which was pretty much in line with expectations.
Looking at rates, Bunds (-53 ticks) have trended lower throughout the session on very thin volumes as prices move away from contract highs printed last week, the absorption of EUR 5bln of Bobl supply (the auction was also bad) and the falls have been further compounded by technical selling on breaks of last week’s lows. At the lows, volumes in Bunds over a minute timeframe were three times their average. Bunds now trade at levels last seen before the SNB/CHF move last Thursday.
