For the first half an hour after China opened, things looked bleak: after opening down 5%, the Shanghai Composite staged a quick relief rally, then tumbled again. And then, just around 10pm Eastern, we saw a coordinated central bank intervention stepping in to give the flailing PBOC a helping hand, driven by the BOJ but also involving NY Fed members, that sent the USDJPY soaring which in turn dragged ES and most risk assets up with it. And while Shanghai did end up closing down -1.7%, with Shenzhen 2.2% lower at the close, the final outcome was far better than what could have been, with the result being that S&P futures have gone back to doing their thing, and have wiped out all of yesterday's losses in the levitating, zero volume, overnight session which has long become a favorite setting for central banks buying E-Minis.
As Bloomberg's Richard Breslow comments, the majority of Asian equity indexes finished with losses but on an upbeat note, helping most European markets to start with modest gains that have increased with the morning, thanks to the aforementioned domestic and global mood stabilization. S&P futures have been positive all day other than a brief dip negative at the worst of the day's China levels. Chinese equities opened quite weak and were down another 5% before the authorities assured the market that speculation they would withdraw from market supportive measures was misguided. This began a rally of over 6% before a mid-afternoon swoon.
There was the usual propaganda out of China, which requested traders rat out any “malicious sellers” and appears to have been inundated with responses…
BREAKING: China's securities regulator has received reports about “massive selloff” yday in stock market, will take actions soon – spokesman
— George Chen (@george_chen) July 28, 2015
… mixed with the facts that China also reported that margin leveraged positions were reported to have been reduced on Monday by the most in two week. Additionally, the PBOC injected CNY 50 billion worth of funds, marking the 10th consecutive injection of liquidity by the central bank.
There was some discussion early over comments by Tom DeMark, popular for predicting the 2013 bottom in the Shanghai Composite, who wrote that “Chinese stocks will decline by an additional 14% over the next three weeks as the market demonstrates a trading pattern that mimics that of the U.S. crash in 1929.”
More troubling was the WSJ's assessment that the continuing “losses are casting doubt on Beijing's ability to contain the slide, and has left investors and analysts wondering what officials might do next to reverse it.
Whether the government's rescue measures are successful or not hinges on performance through the rest of the week, said Zhou Xu, an analyst at Nanjing Securities. “The market consensus that the bottom line for the government is around the 3400 point. If the market slides further, it will be a real disaster.”
Government measures to step up purchases of stocks, announced late Monday, appeared to reassure some investors shaken earlier by the steep losses the day before, when the Shanghai benchmark fell 8.5%. That marked its worst one-day percentage decline since 2007.
On Tuesday afternoon, China's securities regulator announced it would launch an investigation into Monday's selloff.
“Right now the [Chinese] central government is trying to maintain the confidence of the individual investors” that drive China's stock market, said Castor Pang, head of research for Core Pacific-Yamaichi International. If the government “can maintain their confidence, everything can be solved.”
Good luck China, your dazed and confused central planning overlords need it now more than ever.
Elsewhere, the Nikkei 225 (+0.1%) saw a choppy price action, led by sentiment in China. Finally, JGBs traded higher following spill over buying in USTs and Bunds.
