China’s Stock Market Whiplash Extends As Greece, Crude Slump More

Now that China is on the same boat as the rest of the world, and its stock market is a direct reflection of hopes for constant liquidity injections by the central banks, nothing could be better for stocks than bad news, which is precisely what it got. After the biggest crash in the Shanghai Composite in 5 years, what China got just the bad economic update it needed, when it reported a PPI of PPI (-2.7%, Exp. -2.4%), the 33rd consecutive decline and a  CPI (1.4%, Exp. 1.6%), lowest since November 2009, when the big banks’ RRR rate stood at 15.5% vs. current 20%. And so hope of yet more PBOC interventions to halt China’s deflation promptly reversed SHCOMP losses of over 4% on the session (at which point it was just shy of correction territory from recent highs hit just this week), and stocks surged to close up almost 3%, erasing half of yesterday’s losses. This spike came despite reports Chinese regulators may limit brokerages’ interbank borrowing.

And while the PBOC takes one day, it gives the next: the Yuan, which had earlier tumbled by 0.3% despite another stronger fixing by the PBOC, also proceeded to rise 0.14% after speculation the PBOC was injecting liquidity, according to HSBC.  “Yuan recovered from yesterday’s fear of funding squeeze on the back of repo collateral rules, as the fear proved to be overdone and there was talk of liquidity injection by the central bank today,” Hong Kong-based senior FX strategist Ju Wang says in interview.

So there you have it: tightening with one hand, leading the major market sell offs, and easing with the other, resulting in an almost equal and opposite reaction.

Elsewhere in Asia, the Nikkei 225 (-2.25%) tumbled to print a fresh low for the month weighed on by a strong JPY amid flight to quality. Although judging by the now Swiss Watchy rebound in the USDJPY, the Nikkei should do just fine.

And while the biggest Asian markets, and the 2nd and 3rd largest in the world, now trade like Pennystocks on hopes of what central bankers may or may not do, the far more important market right now for everyone, that of crude oil, continues to plumb new depths, with Brent and WTI extending losses. In fact,crude may drop as low as $40/bbl if OPEC solidarity breaks, according to an Iran oil ministry official. API data yday showed crude stockpile gain, contrary to forecasts for decline in today’s EIA report. Jan. Brent -$1.20 at $65.64 at 10:28am London time; intraday low $65.64. Jan. WTI -$1.41 at $62.41; RSI for CL1 generic contract ~25%. Brent-WTI widens to $3.22, settled ydy at $3.02. “We got another set of bearish news overnight,” says Commerzbank commodity analyst Carsten Fritsch.  “EIA shrinking is very unlikely given the API news yesterday”

European equities are trading higher having pared some of the China/Greece inspired sell-off that was seen yesterday. The turn in sentiment comes after lower than expected inflation data overnight in China (CPI/PPI) has increased expectations of potential easing from the central bank and as such has been supportive for the mainland stock index, where the Shanghai Comp closed up 2.9%. Despite the positive mood Greek assets have remained under pressure amid a continuation of Tuesday’s aggressive move with the GE/GR 10yr government bond yield spread trading wider by 62bps, while the Athens exchange is down another 2.0%.

In other US related news, The Fed passed a proposal on Tuesday for risk-based surcharges of up to 4.5% on the 8 US banks to maintain an additional capital supply based on the institution’s system importance. The framework for these charges would be phased in beginning January 2016 through January 2019. Says eight banks face aggregate USD 21bln shortfall today. Says most of eight banks already meet requirements. (CNBC/BBG)

US Congressional leaders have reached an agreement on an USD1.1trl spending bill ahead of Thursday evening’s deadline. This agreement would prevent a government shutdown and fund the federal government until September 2015 and is expected to be passed by Congress this week. (BBG)

To summarize: European shares remain higher with the financial services and tech sectors outperforming and basic resources, oil & gas underperforming. Greek market falls for second day. Brent crude resumed its decline. China’s CPI lower than expected. The German and Italian markets are the best- performing larger bourses, Swiss the worst. The euro is little changed against the dollar. Greek 10yr bond yields rise; Portuguese yields increase. Commodities decline, with WTI crude, Brent crude underperforming and soybeans outperforming. U.S. mortgage applications, monthly budget statement due later.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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