While it took a few hours to realize exactly what China did last night, the fallout in risk markets is now clearly evident when a central bank decides enough-is-enough for speculative wealth creation bubble-followers. As we described last night, China’s tightening has dramatically influenced the carry trade (USDJPY back under 120) and thus global stocks (from Abu Dhabi to Greece), global corporate bonds (all significantly wider) and European peripheral bonds (cracking wider) all face pressure. The beneficiary safe havens so far are precious metals (Gold > $1315) and US Treasuries (30Y at 2014 low yields). For now the mainstream media’s narrative is that this oil-driven (which is fantasy as oil prices are up today) – this is the fallout from the marginal removal of $80bn of leverage collateral from the world’s carry trades…
That said, we summarized it as follows:
- The PBOC has aggressively taken action to reduce leverage in stock and bond market speculation
- The PBOC has tightened monetary policy – raising FX and cutting collateral availability
- The PBOC has created a major squeeze in USDCNY – stalling carry trades
China’s Shanghai Composite Index Drops 5% amid Record Trading
The Athens stock exchange is also crashing by over 10% this morning on the heels of news that the Greek government has accelerated the process to elect the next president and possibly, a rerun of the drama from the summer of 2012 when the Eurozone was hanging by a thread when Tsipras almost won the presidential vote and killed the world’s most artificial and insolvent monetary union.
And finally, the crude plunge appears to have finally caught up with ground zero, with ADX General Index in Abu Dhabi plunging 3.5%, also poised for the biggest drop since 2009. In fact the only thing that isn’t crashing (at least not this moment), is Brent, which did drop to new 5 year lows earlier under $66, but has since staged a feeble rebound.