Desperate Times…

Desperate times call for desperate measures and Mainland Chinese equities came into Friday on track for their worst weekly loss since Vol-pocalypse. 

Cue the vaunted “national team”. 

State funds rode to the rescue after the Trump administration moved ahead with tariff hikes as expected. The Shanghai Composite rose more than 2.5% in the morning session, but when things started to fall apart, Beijing stepped in. By the close, it was the best day for Mainland shares since late March, with the SHCOMP up more than 3%.

Friday marks at least the second time this week that state funds have provided support to domestic equities. During Monday’s rout, state buying could be seen in, for instance, PetroChina and Industrial and Commercial Bank of China, although it wasn’t enough to stop the worst one-day slide in more than three years.

Gains in Mainland shares on Friday marked a contrast with Japanese equities, which fell following the official escalation of the trade dispute. China has pledged to retaliate, although it remains unclear what steps will be taken. Vice Premier Liu He will continue negotiations in Washington with markets eager for a breakthrough. 

Meanwhile, the offshore yuan fell the most since June this week amid the trade tensions.

The PBoC did set the fixing stronger than expected on Friday, but pressure on the currency mounted swiftly following last weekend’s tweets from Trump. Recall this assessment from Sunday:

That eerie calm in the yuan (which recently took a back seat to moves in Chinese equities and bonds) could be over if the market decides to push the currency lower in anticipation of i) possible weaponizing of RMB to send Trump a message and ii) the presumed deleterious effect of new tariffs on China’s economy, where the word “stabilization” is still generally accompanied by adjectives like “nascent” and “fragile”.

This is somewhat ironic for the US president, and it’s a quandary the administration faced last summer when the trade war first began to escalate in earnest – how do you separate market-based currency depreciation from “manipulation?” And if you can’t, how can you be sure that you’re not effectively negating your own tariffs by forcing the market to push the yuan lower? 

Speaking of desperate times and currencies, Turkish banks sold dollars during the Asian session in an apparent bid to boost the lira. As Bloomberg notes, the timing suggests Turkey was trying to “give maximum impact” to their lira buying. 

Initially, there was some confusion. “[This was] potentially due to stops triggered below 6.15″, one trader said, calling it an “exaggerated response” to CBT’s suspension of the one-week repo facility on Thursday. Of course that didn’t make a whole lot of sense, considering CBT’s move was widely seen as weak-willed and characteristically flacid. “There’s panic selling of the dollar even though the market doesn’t know what’s happening”, that trader said, adding that it’s “just sell first, see later”.

Unsurprisingly, it turned out that Turkish banks were in the market via interbank platforms, “selling spot through key levels”, traders told Bloomberg. Liquidity is notoriously thin during that time frame, so, essentially, Turkish banks were trying to blindside market makers and it worked. 

Again, desperate times, desperate measures.