We warned on Friday, after last week's China rout, that the market is getting ahead of itself with its expectation of a RRR-cut by China as large as 100 bps. "The risk is that there isn't one." We were spot on, because not only was there no RRR cut, but Chinese stocks plunged, with the composite tumbling as much a 9% at one point, the most since 1996 when it dropped 9.4% in a single session. The session, as profile overnight was brutal, with about 2000 stocks trading by the -10% limit down, and other markets not doing any better: CSI 300 -8.8%, ChiNext -8.1%, Shenzhen Composite -7.7%. This was the biggest Chinese rout since 2007.
The worst news is that the 3,500 level in the SHCOMP which until recently had been seen as a "hard barrier" for the PBOC, has now been breached, and not only is the Shanghai Composite red for the year after being up 60% a little over 2 months earlier (don't worry though: just like on Yahoo Finance Twitter everyone took profits at the highs), but nobody knows why the Politburo let stocks tumble and worst of all, how much further will it allow stocks to drop.
Elsewhere in Asia, equity markets traded with significant losses on what is being referred to as 'black Monday' amid increased growth concerns coupled with commodities falling to fresh 6 year lows and US stocks in correction, sparked a further sell-off in the region . The ASX 200 (-4.1%) declined by the most in 4 years, Nikkei 225 (-4.6%) and Hang Seng (-5.2%) also saw considerable losses with energy dragging the index lower. 10yr JGBs saw relatively muted trade and are up by 3 ticks.
Risk averse sentiment has dominated the price action in both Asia and Europe as the week kicks off, with Chinese equities again under heavy selling pressure as market participants were left disappointed by the lack of action by the PBOC to ease monetary conditions further. As a result, equity indices in Europe opened sharply lower (Euro Stoxx: -2.3%) and in spite of coming off the worst levels of the session, remain broadly lower, with materials and energy sectors underperforming amid the continued slump in commodity prices. The Dax was well below 10,000 at last check.
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