previewed on Friday and again earlier today when we noted the latest trades in China’s A50 futures…
![](https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/bfmA9D6_0.jpg)
… China’s reopening from the long Lunar New Year holiday was set to be ugly, and sure enough with Chinese stocks resuming trade at 9am on Monday, a wave of selling was unleashed culminating in nothing short of a bloodbath with the Shanghai Composite crashing 9% at the open, down by the most since the bursting of China’s 2015 stock bubble, and wiping out 12 months worth of gains in a corona moment.
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Not even the hilarious beat in China’s Manufacturing PMI (this time from Caixin), which somehow surpased expectations of a 51.0 print by the smallest amount possible at 51.1 (down from 51.5) despite a major portion of China’s population under quarantine and the economy hitting a brick wall, had any impact on stocks.
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What is odd is that this is happening even as China earlier in the day barred short selling, which only means the central bank made a huge oversight and should have also banned all selling altogether.
As stocks collapse the flight to safety is predictably on with 10Y Chinese bond tumbling in yield to 3%, matching the lowest yield since late 2016…
![](https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/china%2010y%20yield%202.2.2020.jpg)
… while spiking in price.
![](https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/china%2010y%20bond.jpg)
The selloff wasn’t limited just to stocks, however, with China’s benchmark iron ore contract falling by its daily limit of 8%, with copper, crude and palm oil also plunging by the maximum allowed. As Bloomberg notes, regions accounting for about 90% of copper smelting, 60% of steel production, 65% of oil refining and 40% of coal output have told firms to delay restarting operations until at least Feb. 10.
This is bad news for anyone still holding on to dreams of a Chinese economic renaissance, as the following correlation between China’s macro surprise index and copper demonstrates.
![](https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/bfm7948_0.jpg)
China’s bloodbath is taking place even as the PBOC scrambled earlier in the day to inject a gross 1.2 trillion in liquidity which however as we explained, was woefully inadequate because when netting off the 1 trillion in short-term reverse repo funds scheduled to mature on Monday, the liquidity injection amounted to a far more modest 150BN yuan, or just over $27BN.
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The lack of any notable impact from China’s reverse repo injection probably explains why shortly after the catastrophic open, the PBOC also cut rates on both its 7 day and 14 day-reverse repo from 2.5% to 2.4%, and from 2.65% to 2.55% respectively.
![](https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/china%20rev%20repo%20rate.jpg)
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Then, as a result of the unexpected additional easing, the Yuan promptly slumped back under 7.00, potentially risking the framework of the US-China trade deal, and the reversal in the US Treasury’s designation of China as a currency manipulator.
![](https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/usdcnh%202.2.2020.jpg)
Then again, in retrospect it’s probably not accurate to say China’s emergency intervention and rate cut has had no positive impact on stocks: after all US futures have surged since the open and are up 0.7%, or 21 points, to 3,245 from Friday’s 3,223 close.
![](https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/ES%20futs%202.2.jpg)
As a reminder, 3,250 is the critical gamma “flip” level which has to be sustained at all costs…
![](https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/gamma%20selling_0.jpg)
… or else any additional selling will only beget even more selling, which is certainly on the mind of whoever is buying the US fits even as China is crashing. Source: ZeroHedge
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