- More than 1,300 China-listed firms call trading halts Wednesday
- Shanghai Composite Index opens 8% down to cap "terrible day," says Moltke-Leth
- Index down 30% since June 12 high as "state intervention fails," says Hansen
- Commodity markets pummelled as oil rally gains wiped out, copper hits 6-year low
- USDJPY probe of 122.00 strengthening with decisive break opening route to 120
- Interbank buying of USDJPY sees strike action at 117-20, says Larsen
- Gold stabilises but unable to assume usual safe-haven role
- Bonds still focused on Greece, but more impactful China weighing, says Boye
Carnage in China
It was carnage in China overnight after something in the region of 1,300 China-listed companies, approximately 40% of the total market capitalisation of the Shanghai Composite Index, announced trading halts.
Why? An 8% plunge on the open was responsible for that with markets barely recovering through the day to finish 6.5% down.
"Chinese stocks went into a a tailspin," says Christoffer Moltke-Leth from Saxo Bank's Singapore desk. "China Securities Finance Corporation said it was after RMB500 billion ($80 bn) to help support equities."
"If those companies had not called halts, it could have been even worse," says Moltke-Leth. "There is real concern that this could spill over into into the broader economy. It's been an absolutely terrible day in Asia."
The index has given back 30% to the market since June 12.
The performance of the SHCOMP put into stark context. Source: Bloomberg
We've known of course for some time that the index had taken on all the characteristics of a bubble and despite the best efforts of the authorities in Beijing, they seem to be powerless to halt the plunge.
The China CDS bonds also moved five basis points wider as "we start seeing some cracks in rate markets," says Michael Boye from the Fixed income desk. "This is a very worrying development and is arguably much bigger than the Grexit."
Commodities devastated
"There is a lack of confidence throughout the commodities sector," says Ole Hansen, head of commodities strategy at Saxo Bank. "We've got critical worries about growth in China and the index is driving markets lower."
"We need to see the stock market stabilise but state intervention so far has not managed to do anything," he says. "This is exacerbated by this happening at a time when liquidity is poor and there are not that many decision makers at their desk."
European benchmark Brent crude has slipped 12% since the slide began, "erasing all the gains" of the recent rally firmly putting the market into bear territory.
Brent crude was at $56.56/barrel at 0655 GMT. WTI crude was at $51.58/b.
Brent was at $64.68/b on June 12 and WTI was at $60.24/b.
WTI 's swift descent towards $50/b.
Hansen points to a rich cocktail of factors building in oil markets that point everything to the downside with the Iran nuclear deal in the offing, the ongoing resilience of the US shale sector, Opec's continued production push and overall rising production in tandem with the possibility that there might now be a decline in demand from China if the stock market carnage spills over into the broader economy.
Copper too is heavily dependent on Chinese demand but it sank to a six-year low overnight as the SHCOMP's descent saw investors scrambling for a foothold.
"In 2009, copper was saved by massive intervention from China but that looks very unlikely today," says Hansen.
Even the likes of gold, typically a safe haven in such risk-off times, could do little more than hold the fort steady at around the $1,150/oz mark. "Gold could go to $1,143/oz or even $1,132/oz," says Hansen.
Gold was at $1,147.93/oz at 0655 GMT. Platinum and palladium too were also on the slide to cap off a miserable day for the metals sector.
Welcome home
One classic safe-haven base that was doing well overnight, however, was the good old Japanese yen.
A USDJPY probe of 122.00 gathered strength throughout the Asia session and looked to have broken through decisively with the pair at 121.73 at 0655 GMT.
"The USDJPY level of 122.00 is breaking down and this time it is for real," says Dan Larsen from the FX Options desk in Copenhagen. "The next important level here is 120.00."
Larsen points to frantic activity in the Options space where the "interbank market has been buying strikes at 117-120."
Risk reversals in the pair all point to the downside mirroring "a scenario we have not seen since January or even further back to October," he says.
Larsen adds that AUDUSD has also seen significant activity overnight after the pair hit a new low of 0.7385, as China concerns and Grexit fears weighed on the market.
Interbank strikes at 117-120 indicate where USDJPY is going. Source: Bloomberg
There it is
Which brings us (rather astonishingly at last) to Greece, something of a relegation for the headline-hogging Mediterranean state compared to recent days.
As far as European bond markets are concerned, Grexit still remains the main focus, says Boye, after Greece seemingly entered into yesterday's negotiations with nothing new on the table.
"it looks like the Greeks came with nothing and they have now been told to go away and come back with something by Thursday," says Boye. "This is essentially an ultimatum with Sunday as the deadline day — either comply or face being forced out of the Eurozone."
Bunds were up sharply to the 154 level, says Boye, who adds that peripheral bonds were also in the black despite the ongoing high-level talks.
"The periphery still looks very safe with Spanish, Italian and Portuguese yields all lower so there does not look like any sign of contagion yet," says Boye. "As for Greece, if it can't make an agreement, the ECB will be forced to suspend the ELA and that could see the entire Greek banking system collapse."
And finally...
All these developments are proving to be something a fly in the ointment for the interest-rate hike bulls who had reckoned on a September move by the US Federal Reserve.
"US Treasury yields are down at 2.25, the lowest since early June," says Boye, a factor that will certainly have been noted by Janet Yellen.