For all those who alleged the Chinese stock move in recent months, was nothing but another investing mania, i.e., bubble, benefiting a select few, because as we showed in July, unlike the US where 70% of household wealth is in financial assets, in China it is the other way around, with three quarters of "net worth" parked in real estate which is merely the latest bubble to pop...
... congratulations, you were right.
This was once again confirmed last night when the Chinese stock market waterfalled into the biggest market crash in over 6 years, with the SHCOMP closing down nearly 8% and in the process triggering various circuit breakers, most notably the CSI 300 index which fell by the 10% daily limit and the Chinese financial index (-9.9%) posting its biggest 1-day drop on record after China cracked down on continuing margin-finance and securities lending violations. In other words, the entire run up was thanks to speculation-enabling margin trading, and massive investor leverage; leverage which may or may not disappear. If the SHCOMP crash accelerates in coming days, wtch as Citic, Haitong et al once again flout regulations with the secret blessing of the PBOC, because an uncontrollable market crash is no longer acceptable to anyone.
Details on the Chinese crash from Bloomberg:
- Shanghai Composite Index falls 7.7%, most since June 2008, after three of biggest China brokerages were suspended from adding margin-finance and securities lending accounts for 3 mos. following rule violations.
- Index erases gain of past 3 weeks; volume roughly matches 3-mo. daily avg
- Property stock index leads rout with 9.1% decline, paring 12-mo. gain to 76%
- CSI 300 falls 7.7% led by financials, energy; 48 stocks drop 9% or more incl. airlines, banks, securities cos.
- “Regulators are concerned that shares have run too hard, too fast:” Bocom strategist Hao Hong
Citic Securities, Haitong Securities -- two of the 3 facing suspension -- plunge by 10% limit in Shanghai - HSCEI falls 5%, most since 2011, led by Haitong Securities (-17%), Citic Securities (-16%)
- China’s regulators don’t “want to crush the rally as such, but they just want to make sure the financial system is sound and not too much leverage has been abused:” Khiem Do, head of Asian multi-asset strategy at Baring Asset Management
- Shenzhen Composite Index closes down 3.4%
- Singapore-traded China stock futures fall as much as 14%
- Stock connect investors turn sellers in China shares
A bigger picture view: Asian equity markets traded mixed with Chinese bourses underperforming amid a crackdown on margin trading, which has prompted a sharp sell-off across brokerages and financials. Consequently, the Hang Seng trades down 1% while the Shanghai Composite (-7.7%) marked its biggest drop since July 2009, with the Chinese financial index (-9.9%) posting its biggest 1-day drop on record. Nikkei 225 (+0.8%) was unable to hold above 17,000 as a strong JPY prompted the index to come off best levels.
And while the move in China may be seen as a BTFD opportunity by some, the reality is that a weak China is here to stay for a long, long time, and in fact, the ongoing housing bubble pop is likely to get far worse before it gets better. To wit:
- IT’S EXAGGERATING TO SAY CHINA PROPERTY MARKET COLLAPSES: JIANG
Curious where crude is going next? Hint: not up:
- CHINA ECONOMY FACES RELATIVELY BIG DOWNWARD PRESSURE, LI SAYS.
Sure enough, that latest surge higher in crude on Friday is once again starting to get undone.
As for the next shocking currency devaluation: could it be the Yuan?
- EUROPE FURTHER EASING MAY BRING PROBLEMS TO CHINA EXPORT: JIANG
That said, following last week's Swiss stock market massacre as a result of a central bank shocker, and last night's crack down by Chinese authorities, it almost appears as if the global powers are doing what they can to orchestrated a smooth, painless (as much as possible) bubble deflation. If so, what Draghi reveals in a few days may truly come as a surprise to all those- pretty much everyone - who anticipate a €500 billion QE announcement on Thursday.
Elsewhere, European equities (Eurostoxx50 +0.2%) trade higher with thin volumes and a light data slate ahead as US markets are closed for the Martin Luther King holiday. The premise of ECB has also supported equities after weekend reports that ECB’s Draghi met with German Finance Minister Schaeuble and German Chancellor Merkel to discuss the extent to which national banks will be liable for the sovereign bond purchase programme, meaning German’s liability will be smaller than any other countries losses. In other news, the SMI (+3.4%) outperforms European indices after recovering from last week’s sharp selloff following the SNB decision. Meanwhile, the energy sector continues to underperform with oil prices slightly lower in the session after comments from the Iraqi Oil Minster overnight.
In FX markets, EUR/USD briefly broke back above 1.1600 triggering stops at the handle with EUR strength observed across the board following subdued market conditions. Elsewhere, in Asia the JPY gained against all of its peers as the Shanghai Comp (-7.7%) marked its largest decline since July 2009 after it was reported that Chinese regulators would crackdown on margin trading which prompted sharp selloff among Chinese bourses.
Iraq’s Oil Minister said Iraq is to boost its crude exports to 3.3mln bpd in 2015 sending WTI and Brent Crude to break the USD 49 and USD 50 handle respectively. In precious metals, Gold (-0.37%) saw a mild loss overnight following last week’s near 5% rise, where the safe-haven soared amid the SNB-triggered FX volatility, with prices of the precious gold metal remaining near 4-month highs after the SPDR Gold Trust also increased holdings by the most since May 2010.
Copper prices have seen a slight pull-back from Friday’s highs amid profit taking ahead of this week’s key-risk events with Chinese GDP scheduled for tomorrow and the ECB meeting on Thursday, while iron futures were also weaker overnight with investor sentiment dampened after data over the weekend showed China’s property prices declined at a faster pace in December.
Credit to Zero Hedge
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