After a 5 day tumbling streak, which saw Chinese stock plunge well over 20% and 17% in just the first three days of this week, overnight the Shanghai Composite was hanging by a thread (and threat) until the last hour of trading. In fact, this is what the SHCOMP looked like until the very end: Up 2.6%, up 1.2%, up 2.8%, up 0.6%, up 2%... down 0.2%. And then the cavalry came in: "Heavyweight stocks like banks and insurance companies helped pull up the index, and it’s possibly China Securities Finance entering the market again to shore up stocks," Central China Sec. strategist Zhang Gang told Bloomberg by phone. Net result: the Composite, having been red just shortly before the close, soared higher by 156 points or 5.4%, showing the US stock market just how it's down.

Then again, today's move was telegraphed a mile away: in fact as we said just yesterday when comparing Chinese stocks to the Nasdaq circa 1999-2001, we said "If past is indeed prologue, now may be a good time to buy some Shanghai Composite calls, especially with China's desperation getting more profound with each passing day."

End result, if only for now:

It wasn't just stocks: as the WSJ reported on its weibo account, China’s central bank also intervened in the yuan swap market, with the PBOC aiming to minimize the impact of yuan devaluation. It would achieve this by confirming what we first reproted two days ago, namely that it was liquidating Treasurys in a move that is certain to attract the Treasury attention, and one which, if taken too far, has practically guaranteed the Fed's QE4 which will be needed not so much to stabilize the stock market as to prevent a rout in the long end. More on that shortly in a follow up post.

Elsehwere in Asia, equities resided in positive territory following the strong tech led gains on Wall Street, where indices posted their best day since 2011 after Fed's Dudley dampened expectations of a September rate hike. Tech stocks performed strongly across all markets particularly in China, where the Shanghai Comp. (+5.3%) saw some interesting price action where it fell briefly into negative territory before the close before rising relatively sharply to end the session higher by over 5% to snap a 5-day losing streak, with some commentators suggesting state purchasing of Chinese equities was behind the late move. Nikkei 225 (+1.1%) received additional support from USD/JPY regaining the 120.00 level while ASX 200 (+1.2%) was further boosted by a bout of strong earnings. JGBs (-8 ticks) traded lower amid strength across Asian equities, while a well-received Japanese 2yr bond auction failed to stoke demand.

PBoC injected CNY 150bIn via 7-day reverse repos for a net weekly injection of CNY 60bIn vs. CNY 150bIn injection last week, while the PBoC offered today's repos at a lower rate of 2.35% vs. Prey. 2.50%.

The euphoria carried over into the European session, as market participants reacted positively to yesterday's comments by Fed's Dudley who dampened expectations of a September rate hike which in turn spurred the biggest gain by US equity indices since 2011.

The upside traction by stocks (Euro Stoxx: +3.2%) was led by materials and energy sectors, with WTI and Brent crude advancing over USD 1.00, while copper prices also rebounded following the recent selling pressure. Elsewhere, Bunds traded lower since the open, with peripheral bond yield spreads tighter as market participants sought higher yield assets.

Commodity and energy sensitive currencies such as AUD, CAD and RUB, all posted decent gains on the back of the latest rally across energy and metals markets. At the same time , EUR/USD ebbed lower amid modest gains in the USD (USD-Index: +0.2%) and the pick-up in sentiment seeing EUR under pressure as a result of its role as a funding currency. Elsewhere, the pick-up in sentiment resulted in broad based JPY weakness and in turn saw USD/JPY advance above 120.00 level.

The upside surge by energy prices comes amid a sharp reversal in risk appetite which prompted US equity indices to post their best day since 2011 after Fed's Dudley dampened expectations of a September rate hike. As such the metals complex has also benefitted, with the likes of gold and copper both firmly in the green heading into US hours. Looking ahead, the notable commodity data comes in the form of EIA natural gas storage change update, which is expected to show a build of 63mmbtu.

Going forward, market participants will get to digest the release of the latest US GDP report (Q2), weekly jobs report and US pending home sales data. More importantly, the focus will be on the latest Kansas City Fed symposium (Jackson Hole) which is due to commence today.

In Summary: Europe’s Stoxx 600 rises 2.9% as of 11:21 am U.K. time on volume that is ~131% of the 30-day average, with the basic resources and oil & gas sectors outperforming and the food & beverage and real estate sectors underperforming.  Index close to intraday highs  Shangai Composite rebounds, rises over 5%. China said to intervene today to shore up stocks, also said to sell Treasuries as dollars needed for yuan support.

Market Wrap (or where were central banks most active overnight)

• Equities: Shanghai Composite (+5.3%), DAX (+3.1%)
• Bonds: Italian 10Yr yield (-2.9%), Spanish 10Yr yield (-2.8%)
• Commodities: WTI Futures (+4.1%), Brent Futures (+3.8%)
• FX: EUR/GBP (+0.4%), Dollar Index (+0.3%)
• U.S. jobless claims, continuing claims, Bloomberg consumer comfort, Kansas City Fed index, GDP, personal consumption, core PCE, pending home sales due later.
• Ukraine Eurobonds surge most on record after country agrees to 20% principal writedown with main creditors, Russia says won’t participate.
• FTSE 100 up 2.4%, CAC 40 up 3.1%, DAX up 3.1%, IBEX 35 up 2.7%, FTSE MIB up 2.5%, S&P 500 futures up 1.2%, Euro Stoxx 50 up 3.2%
• Bonds: German 10yr yield up 1bps to 0.71%, Greek 10yr yield down -26bps to 9.05%, Portugal 10yr yield down -8bps to 2.61%, Italian 10yr yield down -6bps to 1.92%
• Credit: iTraxx Main down 3.6 bps to 71.02, iTraxx Crossover down 19.8 bps to 324.57
• FX: Euro spot down -0.26% to 1.1285, Dollar index up 0.32% to 95.406
• Commodities: Brent crude up 3.8% to $44.77/bbl, Gold up 0.3% to $1129.03/oz, Copper up 1.7% to $5020.5/MT, S&P GSCI up 2.4%
• Asian stocks rise with the Shanghai Composite outperforming and the Kospi underperforming
• Nikkei 225 +1.1%, Hang Seng +3.6%, Kospi +0.7%, Shanghai Composite +5.3%, ASX +1.2%, Sensex +2%
• All 10 sectors rise with energy and financials outperforming and consumer discretionary and materials underperforming
• M&A

Bulletin Headline Summary:

• Risk-on sentiment dominated the European session, as market participants reacted positively to yesterday's comments by Fed's Dudley as well as the positive close in Asian equities
• Source reports suggested that China is to reduce the amount of its US Treasury holdings in order to facilitate manageable depreciation of the CNY and that the rally in Chinese equities may be a result of purchases from the state
• Notable highlights include the release of the latest US GDP report (Q2 S), weekly jobs report and US pending home sales data as well as the latest Kansas City Fed symposium (Jackson Hole) which is due to commence today
• Treasuries gain, 10Y rebounding from decline that pushing yield ~17bps higher over last two sessions; global stocks higher as China’s government said to intervene to end $5t rout.
• Week’s auctions conclude today with $29b 7Y notes, WI 1.885%, lowest since May, vs 2.115% in July
• China wants to stabilize stocks before a Sept. 3 military parade celebrating the 70th anniversary of the victory over Japan during World War II, said the people, who asked not to be identified because the move wasn’t publicly announced
• China has cut its holdings of Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter. Channels include China selling directly as well as through agents in Belgium and Switzerland, according to one of the people; China has communicated with U.S. about the sales, said another person
• As Greece’s Tsipras steps down, his bid to regain a parliamentary majority with early elections risks failing as low turnout and disarray within his Syriza party threaten to yield no clear winner
• Ukraine agreed to a restructuring deal with creditors after five months of talks, giving President Petro Poroshenko some breathing room as he seeks to avert default and revive an economy decimated by a war with separatists backed by Russia
• No IG or HY deals priced yesterday. BofAML Corporate Master Index holds at +172, widest since Sept 2012; YTD low 129.High Yield Master II OAS +1bp to +591; reached +614 Tuesday, widest since July 2012; YTD low 438
• Sovereign 10Y bond yields mixed. Asian and European stocks higher, U.S.equity-index futures higher. Crude oil, gold and copper gain

US Event Calendar

• 8:30am: GDP Annualized q/q, 2Q S, est. 3.2% (prior 2.3%)
• Personal Consumption, 2Q S, est. 3.1% (prior 2.9%)
• GDP Price Index, 2Q S, est. 2% (prior 2%)
• Core PCE q/q, 2Q S, est. 1.8% (prior 1.8%)
• 8:30am: Initial Jobless Claims, Aug. 22, est. 274k (prior 277k)
• Continuing Claims, Aug. 15, est. 2.248m (prior 2.254m)
• 9:45am: Bloomberg Consumer Comfort, Aug. 23 (prior 41.1)
• 10:00am: Pending Home Sales m/m, July, est. 1% (prior -1.8%)
• Pending Home Sales NSA y/y, July, est. 8.3% (prior 11.1%)
• 11:00am: Kansas City Fed Manf. Activity, Aug., est. -4 (prior -7)
• Kansas City Fed Symposium in Jackson Hole, Wyo. begins
• 11:00am: U.S. to announce plans for auction of 3M/6M bills
• 1:00pm: U.S. to sell $29b 7Y notes

DB's Jim Reid completes the overnight recap

Markets this week have not offered much opportunity for deep relaxing sleep. The sudden surge last night in US equities felt like something of a mirror image compared to what we saw on Tuesday as the S&P 500 (SPY) shrugged off weaker sessions in China and Europe to close up 3.90%, its largest one-day gain since the 30th November 2011. Despite a strong start on the back of some decent durable and capital goods orders numbers, nerves appeared to settle in once again with the index paring nearly 2% of the initial gains as Europe declined into the close (Stoxx 600 -1.75%, DAX -1.29%). Some dovish comments from the Fed’s Dudley however, which we’ll touch on shortly, helped lift sentiment and spark a wave of buying in the last few hours of trading which finally brought to an end the six-day rout for US equities.

This morning markets in Asia appear to be following much of the lead from the US session yesterday with decent gains across the board. We’ve seen the usual volatility in China once again where at the midday break the Shanghai Comp is +1.55%, having at one stage more or less wiped out an early 3% gain. The Shenzhen (+1.06%) and CSI 300 (+2.10%) are also off to better starts. Elsewhere, it’s a sea of green across our screens with the Nikkei (+1.10%), Hang Seng (+2.53%), Kospi (+0.75%) and ASX (+1.28%) all up. S&P 500 futures are pointing towards a modestly firmer start while US Treasury yields have dropped 3bps. After a fairly subdued day yesterday, Oil markets have climbed this morning with WTI and Brent up some 2.5%. Elsewhere credit markets are benefiting from the better tone with Asia and Australia indices 3bps tighter.

Coming back to China and digging further into the violent reaction from global markets over the last two weeks, DB’s George Saravelos believes that there is a strong case to be made that it is neither the sell-off in Chinese stocks nor the weakness in the currency that matters the most. Instead, George believes that the bigger picture is what is happening to China’s FX reserves. Back in 2003, China started accumulating almost 4tn of foreign assets (more than all of the Fed’s QE program’s combined) with a global impact equivalent to QE; the PBoC printed domestic money and used liquidity to buy foreign bonds, keeping Treasury yields low and curves flat. Looking ahead to now and following plenty of rounds of global QE, George notes that this may be the first time that a major central bank is effectively unwinding its QE program. The sudden shift in currency policy has prompted a big shift in RMB expectations towards further weakness and correspondingly a huge rise in China capital outflows. In response the PBoC has been defending the RMB, selling FX reserves and reducing its ownership of foreign FI assets, the equivalent of a QE unwind – or Quantitative Tightening (QT). This has seen curves steepen over the last two weeks with real yields moving higher and inflation expectations lower. George argues that there could be more QT to go with China having a sizeable amount of non-sticky liabilities on its balance sheet which could be a source of outflows. An interesting argument and one that supports our view that the world's financial markets are being propped up by central bank's balance sheets and that anything that changes this is likely to be a problems for markets. We suspect that at a global level this era isn't over yet and the ECB, BoJ and the Fed will have to compensate by easing policy relative to where they expected to be at this stage. So the first two might end up buying more and the Fed may stay lower for longer.

Talking of the Fed, yesterday saw interesting comments from the NY Fed’s Dudley. The bulk of the focus was on Dudley’s line that ‘from my perspective, at this moment, the decision to begin the normalization process at the FOMC meeting seems less compelling to me than it was a few weeks ago’. This of course comes after we got some subtle hints from his Fed colleague Lockhart on Monday showing less conviction for a September liftoff. Dudley unsurprisingly, kept the door open, saying that ‘normalization could become more compelling by the time of the meeting as we get additional information on how the US economy is performing, and more information on international and financial market developments’. The probabilities of a September move is now at 24%, down from 26% on Tuesday and well below the 54% highs we saw earlier in the month. The chatter this week from Lockhart and Dudley makes this Saturday’s comments Fed Vice-Chair Fischer, due to speak at the Jackson Hole meeting, all the more important.

The other focus yesterday was on the US dataflow. The main release was the durable goods print for July with the headline showing a decent beat (+2.0% mom vs. -0.4% expected) along with an upward revision to the prior month. There was a strong beat also for core capex orders (+2.2 mom vs. +0.3% expected), the biggest monthly gain since June 2014, with a 50bps upward revision to the June print. Core shipments rose +0.6% mom meanwhile (vs. +0.4% expected) with the June reading revised up a full percentage point to +0.9%. Following the reading, the Atlanta Fed upgraded their Q3 GDP forecast on the back of higher equipment spending in the durable goods orders reading to 1.4% from 1.3%.

Despite Dudley’s more dovish comments, the better than expected data helped support a decent rise in Treasury yields yesterday with the benchmark 10y in particular closing up 10.4bps at 2.176% and now 28bps off the intraday lows we saw on Monday. 2y and 30y yields closed up 7.1bps and 13.3bps while weak demand at a 5y auction also helped support some of the weakness in Treasuries yesterday with the bid-to-cover ratio of 2.34 falling to the lowest level since July 2009.

Also speaking yesterday was the ECB’s Praet. Following on from Constancio’s comments on Tuesday, the board member said that ‘developments in the world economy and in commodity markets have increased the downside risk of achieving the sustainable inflation path towards 2%’. In response to this, Praet reassured the market that ‘there should be no ambiguity on the willingness and ability of the Governing Council to act if needed’ and that the current asset purchasing program ‘provides sufficient flexibility to do so, in particular in terms of size, composition and length’. Those comments helped drag the Euro down yesterday, tumbling 1.76% while sovereign bond yields fell across the region, with 10y Bunds in particular down 2.5bps to 0.702%.

Elsewhere, according to a Reuters article yesterday outgoing Greek PM Tsipras has said that he would be willing to accept an easing of Greece’s debt load should he win fresh elections, without the need for any write-offs. This appears to be a change in stance from Tsipras who had previously argued that Greece would be unable to repay its debt unless write-offs were made, but seemingly now switching his view to one of more acceptance for longer maturities and a lowering of interest rates.

Looking at today’s calendar now, Euro area money supply and credit aggregates readings along with French confidence indicators are the main highlights in the European session. Over in the US this afternoon the focus will be on the second reading for Q2 GDP (with the market expecting an upward revision to 3.2% from 2.3% on the back of the latest data on construction, inventories and trade) along with the Core PCE print. Pending home sales data, initial jobless claims and the Kansas City Fed manufacturing activity index are the other releases due today.