After several months of artificial, centrally-planned calm in Chinese markets, where "malicious sellers" found out the hard way the Politburo means business, overnight the relative quiet in Chinese stocks since August broke with a bang when the Shanghai Composite tumbled as much 6.1% before closing down 5.5%, the biggest drop in three months and the largest weekly loss since the depth of the Chinese rout in mid-August while a gauge of Chinese volatility surged from the lowest level since March. 

China's market weakness pushed markets around the globe lower, and as a result all the levitation gains in yesterday's holiday market have been wiped out:

• S&P 500 futures down up 0.1% to 2089
• Stoxx 600 down 0.2% to 384
• FTSE 100 down 0.3% to 6375
• DAX down less than 0.1% to 11320
• German 10Yr yield down less than 1bp to 0.46%
• Italian 10Yr yield down 3bps to 1.4%
• MSCI Asia Pacific down 0.9% to 133
• US 10-yr yield down 2bps to 2.21%
• Dollar Index up 0.11% to 99.91
• WTI Crude futures down 2% to $42.20
• Brent Futures down 1.1% to $44.98
• Gold spot down 0.4% to $1,068
• Silver spot down 1.1% to $14.12

The Chinese selloff was driven by a trifecta of catalysts: some of China's largest brokerages (Citic, Guosen) disclosed regulatory probes and quickly plunged limit down while Guotai Junan and Haitong said they are facing anti-graft checks; additionally two companies announced bond payment difficulties and finally, overnight China reported that industrial profits fell 4.6% y/y in October, far worse than the -0.1% decline the month before.

Citic Securities said it received a notice from the China Securities Regulatory Commission on Thursday saying it will be investigated because it allegedly violated regulations on the supervision and administration of securities firms. The brokerage said it will cooperate with the probe and its operations are normal. Guosen Securities also said it was being investigated by the CSRC for similar alleged rule violations. Haitong Securities said after the market close it was being probed without providing details.

And so "China is back again on the table with a huge loss this morning as lots of investors were trying to use the recent lows to invest and the latest data and talk of how difficult it is for brokers to work there scared them off,” said John Plassard, a senior equity-sales trader at Mirabaud Securities LLP in Geneva, cited by Bloomberg.

AS Bloomberg reports, the probe into the finance industry comes as the government widens an anti-corruption campaign and seeks to assign blame for the selloff earlier this year. In doing so, ironically it is setting the stage for the next big selloff.

Authorities are testing the strength of a nascent bull market by lifting a freeze on initial public offerings and scrapping a rule requiring brokerages to hold net-long positions, just as the earliest indicators for November signal a deterioration in economic growth. A Chinese fertilizer maker and a pig iron producer became the latest companies to flag debt troubles after at least six defaults this year.

“The sharp decline will raise questions whether the authorities’ confidence that we are seeing stability in the Chinese markets may be a tad premature,” said Bernard Aw, a strategist at IG Asia Pte. in Singapore. “The rally since the August collapse was not fundamentally supported. The removal of restrictions for large brokers to sell and the IPO resumptions may not have been announced at an opportune time.”

As a result of the broker-led swoon the Shanghai Composite’s pared gains since its Aug. 26 low to 17 percent, while commodities were also impacted which had benefited in the previous session from a report China's metals association had requested a government bailout as well as a crackdown on "malicious sellers" of metals.

The other top Asian news:

• China to Ban Derivatives Funding for Stock Trading, CSRC Says: Securities Association of China will ban brokerages from offering financing for stock market trading using derivatives
• China Calm Shattered as Brokerage Probe Sparks Selloff in Stocks: CSI 300 index closes down 5.4%, most in 3 mos.
• China’s Bond Stresses Mount as Two More Companies Flag Concerns: Jiangsu Lvling Runfa says it’s unable to repay bonds Dec.
• Rich Asians Mostly Stick With Dollar Rally UBS Says Near End: Bank starts trade of selling euro against Norway’s krone
• Aussie’s Slide Spurs Weakest Inflation Response Since Float: Australia importing low inflation keeps RBA easing talk alive
• Japan’s Government Gets Paid to Borrow at Two-Year Note Auction: Sale of 2.5t yen of the debt had record-low yield of minus 0.004%
• China Unveils Biggest Army Overhaul in Decades to Project Power: President seeks to tighten political control over military
• Japan Oct. Core Consumer Prices Fall 0.1% Y/y; Est. -0.1%
• Japan Oct. Unemployment Rate at 3.1%; Est. 3.4%

In European markets equities kicked off the final session of the week in negative territory before paring losses throughout the European morning to head into the North American crossover in modest positive territory (Euro Stoxx: +0.2%). The most notable underperformers in Europe were material and energy names amid softness in the commodity complex following the aforementioned downbeat sentiment in Asia and USD strength.

Despite the losses seen in Chinese equities, news flow in European hours has been fairly light and as such, Bunds trade modestly higher in tandem with the weakness seen in equities.

European top news:

• Infineon Soars to 13-Year High After Earnings Beat Estimates: Post growing sales from power management and security products
• Abengoa’s Bondholders Jumping Ship as Insolvency Concerns Mount: Creditors faced with choice of dumping holdings or taking their chances on eventual settlement
• Novartis Said to Consider Selling Contact Lens Care Division: Seeks to improve growth at its eye-care unit, Alcon
• Merck KGaA Said to Weigh Allergy Therapy Unit Sale to Trim Debt: Seeks to cut debt after $17b takeover of Sigma- Aldrich
• Standard Chartered Facing Highest Hurdles in BOE Stress Tests: Investors to find out Dec. 1 if lender has done enough to weather latest round of stress tests
• Glencore Says Disputed Libyan Oil Deal Has Global Support: Oil chief Beard defended co.’s crude-export contract with Libya’s National Oil Corp. in west of divided country after competing administration in east threatened to block its tankers
• U.K. Home-Price Growth Slows to Five-Month Low, Nationwide Says: Notes a shortage of properties for sale
• Euro-Area Confidence at Highest in 4 Years as ECB Mulls Stimulus: Figures are the strongest since May 2011

In FX, amid the light news flow the most significant FX move came in the form of broad based CHF weakness , with USD/CHF reaching its highest level since 2010 and EUR/CHF breaking above the 1.0900 handle and November highs. Given the expected upcoming ECB stimulus, this could potentially spur suggestions of preemptive SNB intervention at some stage, ahead of the ECB rate decision and press conference next Thursday. The European morning saw a bout of strength in the USD index (+0.2%), to move back above the 100.00 level, with Wednesday's 100.17 the next level of resistance.
 
In Commodities, oil continues its decline after yesterday's announcement by the Libyan NOC that it has seen good progress in restarting production from its largest oil field. Furthermore, WITI and Brent have been weighed upon by a firmer USD. In the metals complex, gold has seen downward pressure since European participants came to their desks, in tandem with underperformance in silver, with prices of the yellow metal on course for its 6th consecutive weekly decline, now trading at the lowest levels since February 2010.

Top Global News:

• Black Friday Retailers Pile on Discounts to Lure Frugal Shoppers: The shaky condition of U.S. retail will be put to the test this weekend, when Wal-Mart Stores, Macy’s and other chains roll out their Black Friday specials
  • EBay Early Thanksgiving Comps Up 11.1% Y/y: ChannelAdvisor
  • Online Sales Surge Ahead of Brick-and-Mortar Retailers’ Big Day
• Naspers Said to Plan Showmax Expansion to Take on Netflix: Plans to expand video-streaming competitor to Netflix into 3 new continents next year, Samsung to include service on TVs
• U.S. FDA Warning Poses Threat to Dr. Reddy’s Revenue Outlook: India’s 2nd-largest drugmaker could see sales come under pressure as it faces scrutiny from FDA over manufacturing practices at its factories
• Oil Pares Weekly Advance as Libya Seeks to Boost Crude Supply: Oil pared first weekly gain in a month
• Brazil Surprises Analysts With Worst Primary Budget Gap of Year: Underscores administration’s challenges in shoring up fiscal accounts
• U.K. Domestic Demand Lifts Economy as Net Trade Has Record Drag: Consumer spending up for 17th straight quarter

Bulletin Headline Summary From Bloomberg and RanSquawk

• Amid the light news flow, the most significant FX move came in the form of broad based CHF weakness, with USD/CHF reaching its highest level since 2010
• European equities kicked off the final session of the week in negative territory before paring losses throughout the European morning to head into the North American crossover in modest positive territory (Euro Stoxx: +0.20%)
• Looking ahead, highlights include ECB's Linde and Knot, although yesterday's Thanksgiving holiday could lead to another quiet session
• Treasuries gain amid rout in China shares as some of the nation’s largest brokerages disclosed regulatory probes; volumes light as UST futures trading close at 1pm, cash at 2pm.
• Citic Securities and Guosen Securities late Thursday announced probes by the securities regulator and Haitong Securities confirmed Friday it was under investigation
• The Securities Association of China will ban brokerages from offering financing for stock market trading using derivatives, the country’s securities regulator said
• A Chinese fertilizer maker and a pig iron producer have flagged bond payment difficulties, adding to signs of stress in the nation’s corporate note market after at least six defaults this year
• Russia’s Vladimir Putin gave a tentative nod toward cooperation with an anti-terror alliance sought by France’s Hollande after the two met for almost three hours in Moscow on Thursday
• President Xi Jinping announced a major overhaul of China’s military to make the world’s largest army more combat ready and better equipped to project force beyond the country’s borders
• Portugal’s new Prime Minister Antonio Costa will need to keep a group of anti-austerity radicals onside to sustain his minority Socialist government after his maneuver to seize power tore up a four-decade political convention
• Euro-area economic confidence matched its highest level in more than four years as the European Central Bank prepares to make a decision on whether to increase stimulus
• No IG or HY deals Wednesday. BofAML Corporate Master Index OAS widens 1bp to +163, YTD range 180/129. High Yield Master II OAS widens 2bp to +637, YTD range 683/438
• Sovereign 10Y bond yields lower. Asian stocks plunge, European stocks gain, U.S. equity-index futures higher. Crude oil and gold lower, copper little changed

US Economic Calendar

• No data