June 20 Marketwatch: Global Edition

Well, it seems that the markets are still very unstable at the moment.....and the fact that China's interbank market has frozen doesn't bold well for us. Seems very like Lehman in my opinion:





Several Asian markets are down by about 3%, while the Japanese market success looks to be completely dependent on the BoJ to prop it up (just like the DOW, this is the second day of losses after the FED merely hinted at a tapering of QE) Also, the Indian bond market has been frozen while Chinese bonds are rising.

Also, the Aussie dollar is getting hit hard and many say the same of the Canadian dollar.

But I highly recommend that everyone look at the bond markets around the globe, look at the continuing deterioration in Japan / Brazil - eventually their will be a NEED to sell US bonds, further increasing the pressure to rise interest rates.

Is this going to be a rocky summer, followed by an even worse autumn? Are we looking at a collapse? (yes, I know we have heard that a million times before, but is this THE ONE?

and for you gold and silver bugs, I would hold off in buying in this dip, I think those precious metals will continue to fall.

Originally posted by MidnightTide
and for you gold and silver bugs, I would hold off in buying in this dip, I think those precious metals will continue to fall.

In my opinion they will fall. Only to be followed by a HUGE increase!

Here Is What's Going On In China: The Bronze Swan Redux

A month ago, when stock markets around the globe were hitting all time highs, we wrote "The Bronze Swan Arrives: Is The End Of Copper Financing China's "Lehman Event"?" which as so often happens, many read, but few appreciated for what it truly was - the end of a major shadow leverage conduit (one involving unlimited rehypothecation at that),and the collapse of a core source of shadow liquidity. One month later, China's "Lehman event" is on the verge of appearing, and with Overnight repo rates hitting 25% last night, coupled with rumors of bank bailouts rampant, it very well already may have but don't expect the secretive Chinese politburo and PBOC to disclose it any time soon. So now that the market has finally once again caught up with reality, for the benefit of all those who missed it the first time, here is, once again, a look at the arrival of China's Bronze Swan.

From May 23:

The Bronze Swan Arrives: Is The End Of Copper Financing China's "Lehman Event"?

In all the hoopla over Japan's stock market crash and China's PMI miss last night, the biggest news of the day was largely ignored: copper, and the fact that copper's ubiquitous arbitrage and rehypothecation role in China's economy through the use of Chinese Copper Financing Deals (CCFD) is coming to an end.

Copper, as China pundits may know, is the key shadow interest rate arbitrage tool, through the use of financing deals that use commodities with high value-to-density ratios such as gold, copper, nickel, which in turn are used as collateral against which USD-denominated China-domestic Letters of Credit are pleged, in what can often result in a seemingly infinite rehypothecation loop (see explanation below) between related onshore and offshore entities, allowing loop participants to pick up virtually risk-free arbitrage (i.e., profits), which however boosts China's FX lending and leads to upward pressure on the CNY.

Since the end result of this arbitrage hits China's current account directly, and is the reason for the recent aberrations in Chinese export data that have made a mockery of China's economic data reporting, China's State Administration on Foreign Exchange (SAFE) on May 5 finally passed new regulations which will effectively end such financing deals.

The impact of this development can not be overstated: according to independent observers, as well as firms like Goldman, this will not only impact the copper market (very adversely) as copper will suddenly go from a positive return/carry asset to a negative carry asset leading to wholesale dumping from bonded warehouses, but will likely take out a substantial chunk of synthetic shadow leverage out of the Chinese market and economy.

Naturally, for an economy in which credit creation is of utmost importance, the loss of one such key financing channel will have very unintended consequences at best, and could potentially lead to a significant "credit event" in the world's fastest growing large economy at worst.

But before we get into the nuts and bolts of how such CCF deals operate, and what this means for systemic leverage, we bring you this friendly note released by Goldman's Roger Yuan overnight, in which Goldman not only quietly cut their long Copper trading recommendation established on March 1 (at a substantial loss), but implicitly went short the metal with a 12 month horizon: a huge shift for a bank that has been, on the surface, calling for a global renaissance in the global economy, and in which Dr. Copper is a very leading indicator of overall economic health and end demand.

www.zerohedge.com...

I would have thought it would be some European country that would rock the boat, but China? Who would have thought. Essentially if you read the article you find that China's shadow "fake" economy is riding on copper, and that metal is getting HIT HARD today. With the changing of lending rules in China, you may be seeing a lot of banks collapsing - and with the new and wonderful global economy where everyone is interconnected via loans / derivatives who knows what is going to happen.

Originally posted by MidnightTide
Is this going to be a rocky summer, followed by an even worse autumn? Are we looking at a collapse? (yes, I know we have heard that a million times before, but is this THE ONE?

I've been pondering this myself lately and debating when or if to sell some of my shares after an incredible Q1. Most of the trend analysis models are all indicating a correction though so I think I'll hold off for a while.

Good call on the bond markets. Also might be worthwhile to check out the forex market, though that's much riskier.

Actually I've long thought China could be the culprit. I never dismissed the possibility of an European country, but China is the world's second biggest economy and its growth has been dependent on credit which is fast getting very costly and now we're seeing a credit squeeze, and the PBOC stuck between a rock and hard place with a housing and credit bubble to boot.

Seems Lehman like isn't it?

Well well, I just got back home from work (and went to go see World War Z) and look at that.....the 10 year bond went up again!

US 10 yr adds 15 bips yesterday to hit 2.35
US 10 yr adds 15 bips today to hit 2.5


The Chinese bond market is also looking troubled (and still zero interbank lending). If this keeps up - THEN WATCH OUT.

Originally posted by MidnightTide

The Chinese bond market is also looking troubled (and still zero interbank lending). If this keeps up - THEN WATCH OUT.

Agree with you here, but just wondering how much the PBOC can / will intervene with liquidity injections to save the system, over and over?

Like they did yesterday with injecting 50 billion Yuan (8.2 billion USD) into the banking system.

I guess it can't be indefinite as it will only further exasperate the property and credit bubbles.

reply to post by surrealist


I believe they are going for a hard landing, that is - they know the shadow economy is bust but they would rather crash it on their terms.....unlike the FED.

So it isn't only China that is going through a collapse of interbank loans, it is happening in the Eurozone as well:

www.telegraph.co.uk...