With China's currency devaluation having shifted to the back-burner if only for the time being, all attention was once again on the Chinese stock market roller coaster, which did not disappoint: starting off with yesterday's dramatic 6.2% plunge, the Shanghai Composite crashed in early trading, plunging as much as 5% in early trading and bringing the two-day drop to a correction-inducing 11%, and just 51.2 points away from the July 8 low (when China unleashed the biggest ad hoc market bailout in capital markets history). And then the cavalry came in, and virtually the entire afternoon session was one big BTFD orgy, leading to a 1.2% gain in the Shanghai Composite closing price, while Shenzhen and ChiNext closed up 2.2% and 2.7%, respectively.

According to the WSJ, the U-turn came after a handful of companies disclosed their biggest shareholders, some of which included state-backed firms. Analysts say that gave investors a sense of security in Beijing’s market role.  As a reminder, one of the reasons given for yesterday's tumble in Chinese stocks was that "investors" did not get a bailout: "At 2 p.m. it started to turn south again at a very fast rate,” said Steve Wang, a research director at Reorient Group. “People questioned why the government hadn’t yet stepped in” at a time of the day that it usually would, he added.

Today it did and as Reuters notes, "state-backed buyers later rushed in, enabling stocks to finish the day more than 1 percent higher."

“It’s a clear sign that the government is intervening in the market…otherwise their previous efforts would have been in vain,” said Zeng Xianzhao, a manager at Nuoding Asset Management.

It is a pattern that has been repeated several times since Beijing's "national team", a coalition of state-backed financial institutions and regulators, went into action early last month with instructions to halt a crash in share prices.

Investors say China's stock markets - which were never for the faint of heart - have become dysfunctional since the government's massive and unprecedented rescue effort.

Just to make sure there is enough liquidity in the aftermath of the liquidity-draining Yuan devaluation, overnight the PBOC also injected 110 billion yuan ($17.18 billion) worth of liquidity into the nation’s banking system on Wednesday through its medium-term lending facility (MLF). The People’s Bank of China said in a brief statement that it injected the funds through 14 banks. The lending facility had a maturity of six months with a 3.35% interest rate.

This follows another massive liquidity injection yesterday, not only via reverse repo but by direct injections into banks: the central bank on Tuesday completed putting $48 billion into the China Development Bank and $45 billion into the Export-Import Bank of China, the official Xinhua news agency reported.

Some examples of company attempts to reassure investors on their own without the "National Team", included Dongxu Optoelectronic Technology, which in a company filing midday on Wednesday, disclosed that its third- and fourth-largest shareholders as of August 14 were China Securities Finance Corp., the state-run firm tasked with propping up the market, and Central Huijin Investment, the domestic investment arm of China’s sovereign-wealth fund. Stock of the company, which manufacturers electronic-accessory components, hit its upward daily limit of 10%.

Also Wednesday, Zhefu Holding Group, which manufacturers turbine generators, disclosed that Central Huijin is the company’s biggest shareholder, according to a filing on the Shenzhen stock exchange. Its shares also limited up.

While not all companies counting state-backed firms among their biggest shareholders gained Wednesday, the announcements offered enough of a confidence boost to spill into the broader market. And with little needed to reignite speculator greed, the scramble to BTFD with a government backstop was on, resulting in a green close after what has been another 2 day nausea inducing roller-coaster ride.

Still, as we reported yesterday both the richest traders and long-term investors are staying well to the sidelines, moving their cash into bonds and the money market, or simply selling to wave after wave of retail investors, as roller-coaster markets and a gloomy stream of economic news heighten their anxiety over the world's second-largest economy. "We advise strapping in for a bumpy ride," said Tim Condon, head of Asia research for ING Bank in Singapore.

And while China's PPT helped rescue local stocks once more, neighboring Hong Kong was not so lucky, and the Hang Seng Index fell 1.3% Wednesday, wiping out all year-to-date gains.

Elsewhere in Asia, the Nikkei 225 (-1.6%) was led lower by materials amid China growth concerns prompting a sell-off in commodities, coupled with worries over the latest trade figures. ASX 200 (+1.5%) outperformed with the index bolstered by strong earnings. JGBs rose after the BoJ entered the market to purchase JPY 780b1n of government debt.

European equities reside firmly in the red this morning (Euro Stoxx: -0.8%) amid light news-flow following on from negative sentiment in Asia and ahead of today's key risk events in the form of US CPI and FOMC minutes release. The Euro Stoxx 50 future traded to its 200- DMA for the first time in a month. The Dax is now well through its 200-DMA and today’s close should be closely watched.

Norway’s sovereign wealth fund reported its first quarterly loss in three years. Losses came from its bond portfolio and U.S. shares. They repeated that they remain long term committed to Chinese shares. Norwegian shares are down about 1%

U.K. shares are heavy weighed by Glencore, which posted a 56% decline in first-half profit. The stock is also the year’s worst FTSE 100 performer.

U.S. equity futures are down about 0.3%. Later today, CPI will be reported and the Fed will release the minutes from its July meeting. Both events are important and closely watched.

FX markets have remained relatively subdued, with the USD-index (-0.1%) residing in negative territory ahead of the aforementioned US risk events, while AUD recovered from overnight weakness in line with the move higher prior to the close with the Shanghai Composite to see AUD/USD trade in positive territory throughout the European morning. Finally, fixed income markets have been bolstered by the weakness in equities, with T-Notes currently residing in positive territory with no US auctions scheduled for today.

Elsewhere, as expected German lawmakers have approved a 3rd Greek bailout.

Commodities have experienced a mixed session today, with gold moving higher amid the stronger USD, while Iron ore saw its largest decline in a month and copper reached fresh 6 year lows on concerns regarding Chinese growth . Away from the metals complex, energy products today have traded flat amid relatively light news-flow as participants await today's DoE crude oil inventories (Exp. drawdown of 820k) after yesterday's API inventory showed a drawdown of 230k.

In summary: European shares fall with the chemicals and basic resources sectors under-performing and real estate, telco outperforming.  Asian stocks fall led by Nikkei 225. Shanghai Composite pared losses of as much as 5% to rise over 1%. Vietnam devalued its currency for the third time this year, by 1%. Oil recovers from earlier decline, Iraq says a production boost was important to meet the needs of its growing population, Angola to export most crude in almost 4 years in Oct. German parliament appears set to back a third bailout for Greece. The German and French markets are the worst-performing larger bourses, the Swiss the best. The euro is stronger against the dollar. Irish 10yr bond yields rise; French yields decline. Commodities gain, with WTI crude, soybeans under-performing and zinc outperforming. U.S. mortgage applications, CPI, Fed minutes due later.

Market Wrap

• S&P 500 futures down 0.4% to 2086
• Stoxx 600 down 1.1% to 383.8
• US 10Yr yield down 1bps to 2.19%
• German 10Yr yield little changed at 0.64%
• MSCI Asia Pacific down 0.6% to 136.2
• Gold spot up 0.5% to $1123.2/oz
• All 19 Stoxx 600 sectors drop; real estate, telco outperform, chemicals, basic resources under-perform
• Eurostoxx 50 -1.2%, FTSE 100 -1.1%, CAC 40 -1.2%, DAX -1.3%, IBEX -0.8%, FTSEMIB -0.9%, SMI -0.8%
• Asian stocks fall with the ASX outperforming and the Nikkei under-performing; MSCI Asia Pacific down 0.6% to 136.2
• Nikkei 225 down 1.6%, Hang Seng down 1.3%, Kospi down 0.9%, Shanghai Composite up 1.2%, ASX up 1.5%, Sensex up 0.5%
• Euro up 0.36% to $1.1064
• Dollar Index down 0.29% to 96.76
• Italian 10Yr yield down 1bps to 1.81%
• Spanish 10Yr yield down 1bps to 2%
• French 10Yr yield down 1bps to 0.97%
• S&P GSCI Index up 0.2% to 362.8
• Brent Futures up 0.3% to $48.9/bbl, WTI Futures down 0.1% to $42.6/bbl
• LME 3m Copper up 0.2% to $5046/MT
• LME 3m Nickel up 0.7% to $10430/MT
• Wheat futures up 0.5% to 501 USd/bu

Bulletin Headline Summary from Bloomberg and RanSquawk

• European equities reside firmly in the red this morning (Euro Stoxx: -0.8%) amid light newsflow following on from negative sentiment in Asia and ahead of today's US CPI and FOMC minutes release
• FX markets have remained relatively subdued, with the USD-index (-0.1%) residing in negative territory ahead of the aforementioned US risk events
• As expected German lawmakers have approved a 3rd Greek bailout in a 454-113 vote
• Treasuries steady before report forecast to show consumer prices (headline and core) rose 0.2% in July and Fed releases minutes of last month’s meeting.
• If minutes viewed “as a signal that liftoff in September is a high probability outcome,” 2Y and 5Y yields “could sell off by at least 5bp and 13bp, respectively,” Morgan Stanley says
• Emerging-market stocks sank to a four-year low on concern capital outflows will accelerate amid prospects of higher U.S. interest rates and a slowing Chinese economy
• Glencore Plc slid as much as 9.4% in London after reporting a 56% in 1H profit on the China-led rout in commodities; plans further spending cuts as it seeks to maintain dividends while preserving IG rating
• It’s getting harder to predict metals consumption in China, the world’s biggest user of raw materials, Glencore CEO Ivan Glasenberg said in a phone interview in London
• The PBOC injected liquidity to some China banks today through its Medium Term Lending Facility to ease liquidity pressure after devaluation of yuan, Reuters reports, citing 3 unidentified people with knowledge of the matter
• The German parliament voted in favor of a third bailout for Greece, one of the last hurdles to approving the program, after Merkel pressed lawmakers to lend their support
• Aim of 3rd bailout is to help Greece again stand on its own feet, German Finance Minister Wolfgang Schaeuble says ahead of vote in parliament; Greece’s compliance will be controlled step for step
• Sovereign 10Y bond yields lower. Asian stocks mixed, European stocks lower, U.S. equity-index futures decline. Crude oil and copper lower, gold gains

US Event Calendar

• 7:00am: MBA Mortgage Applications, Aug. 14 (prior 0.1%)
• 8:30am: CPI m/m, July, est. 0.2% (prior 0.3%)
  • CPI Ex Food and Energy m/m, July, est. 0.2% (prior 0.2%)
  • CPI y/y, July, est. 0.2% (prior 0.1%)
  • CPI Ex Food and Energy y/y, July, est. 1.8% (prior 1.8%)
  • CPI Index NSA, July, est. 238.752 (prior 238.638)
  • CPI Core Index SA, July, est. 242.552 (prior 242.193)
  • Real Avg Weekly Earnings y/y, July (prior 1.8%)

Central Banks

• 11:30am: FOMC Minutes, July 28-29

DB's Jim Reid Concludes the overnight event wrap

Just after I suggested that the summer lull was upon us yesterday, another late dip in the Chinese equity market just after we went to print livened up markets over the last 24 hours and that continues to be the case this morning. The Shanghai and Shenzhen Composites fell 6.15% and 6.58% yesterday and are -3.12% and -2.98% as we go to print, although they had tumbled as much as 5% prior to the midday break. They were, however, only down around 1.5% this time yesterday so anything can happen in that last two hours after trading resumes for the afternoon session.

This latest slump was seemingly sparked initially by the back of the still soft, but improving house price data which we noted in yesterday’s report and which dampened some hopes that broader government stimulus is around the corner. However the bulk of the emphasis has been placed on the news from the Securities Regulator late on Friday that the state-owned margin lender China Securities Finance Corp will no longer conduct daily interventions to help support the market, putting investors on edge that the interventions we saw following the huge slump in Chinese equity markets a month or so ago might now be a more rare occurrence. It was also interesting to see that the PBoC yesterday injected the largest amount of cash into the financial system in a single day almost 19 months (through reverse repos), a signal perhaps that there could be concerns of capital outflows following the recent Yuan devaluation.

Looking at the rest of Asia this morning, that weakness in China has seen a broad-based sell-off across bourses across the region. The Nikkei has fallen 1.32%, while there are also steep declines for the Hang Seng (-1.03%) and Kospi (-1.59%). The ASX (+1.29%) is the lone outlier although the index has pared back earlier stronger gains. There’s been further action in the FX space meanwhile with the State Bank of Vietnam again taking the step to devalue the Dong, lowering the currency by 1% and widening the trade band in the process after a similar move last Wednesday in response to the PBoC. Despite very small moves in the Yuan this morning, the Malaysian Ringgit (-0.62%) in particular has declined, while the Taiwanese Dollar (-0.20%) and Indonesian Rupiah (-0.33%) are also weaker. 10y Treasury yields are a basis point lower while Oil markets have sold off half a percent. Meanwhile, the Yen has strengthened slightly (+0.10%) after Japan reported the biggest trade deficit since February (¥268bn vs. ¥153bn expected) on the back of decelerating exports (7.6% yoy from 9.5% last month) in particular.

Back to yesterday. The sharp sell-off in China bourses hit sentiment in DM but was relatively well contained for the most part as equity markets on the both sides of the pond finished with just modest declines, extending the fairly range bound nature in equities at the moment. Led by weakness for materials and tech stocks in particular, the S&P 500 closed down 0.26% while the Nasdaq and Dow finished 0.64% and 0.19% lower respectively. Closer to home, having traded between gains and losses over most of the session, the DAX (-0.22%) and CAC (-0.27%) both closed a tad lower, although the Stoxx 600 (+0.22%) did manage to creep into positive territory.

Although equity markets were fairly range bound yesterday, there was plenty of volatility once again in the commodity space and Oil in particular. A rally in the late-afternoon yesterday on the back of expectations that today’s EIA report may show a drop in US stockpiles helped WTI close up +1.79% and bounce back above $42. Brent (+0.14%) also recovered having traded as much as 1% lower intraday. It was a sea of weakness across the rest of the complex yesterday however. Base metals in particular suffered with Copper and Aluminum tumbling 1.56% and 0.89% respectively (both marking six-year lows) with the former at one stage breaking below $5000/tn temporarily. Precious metals were under considerable pressure with Silver (-2.98%), Platinum (-0.36%) and Palladium (-2.72%) all down, while Gold finished unchanged following the latest US housing data. Despite the bounce back in oil, US HY energy spreads moved another 2bps wider and are now around 120bps wider MTD already. Spreads are starting to create some distance from the previous December 2014 wides too, sitting around 70bps wider now. For comparison, broader HY spreads are 34bps wider MTD.

In terms of the US data flow, housing starts rose +0.2% mom during July which, although less than expected, combined with a decent upward revision to June to see the annualized rate tick up to 1.21m (vs. 1.18m expected) and the most since October 2007. Building permits were soft (-16.3% mom vs. -8.0% expected) which dragged the annualized rate back down to 1.12m from 1.34m, although as we had noted yesterday the distortions from the tax break changes had a significant impact in the Northeast region in particular and in fact the three-month moving average was little changed. That helped fuel another decent day for the Greenback with the Dollar index closing +0.24% and its fourth consecutive daily gain. Treasury yields nudged up with the data, the benchmark 10y yield closing up 2.5bps at 2.193%. There was little change in Fed Funds contracts however, while the probability of a September move by the Fed was unmoved at 48%. Interestingly there was a notable upgrade to the Atlanta Fed’s GDPNow Model forecast for Q3 growth to 1.3% from the August 13th 0.7% reading following the latest housing starts and IP numbers (particularly as a result of a boost from motor vehicle assemblies last month). That said the forecast is still well below the current market estimates which generally sit in the 2.2% to 3.5% range according to the report.

It was a day of rising sovereign bond yields across Europe too yesterday. 10y Bunds finished 1.6bps higher at 0.641% while yields in Italy (+5.2bps), Spain (+6.1bps) and Portugal (+10.5bps) all moved higher. Gilt yields (+5.8bps) also climbed while Sterling rallied +0.48% against the Dollar following the latest July inflation numbers. Headline CPI for month came in a tad higher than expected at -0.2% mom (vs. -0.3% expected), nudging the annualized rate up to +0.1% yoy from flat. It was the core reading which generated the most upside surprise however, coming in at +1.2% yoy (vs. +0.9% expected) supported by clothing prices in particular. DB’s George Buckley noted that it’s too early to be confident that this is a new trend in core inflation, given that just a month earlier the core was running at a near 15-year low. However, George notes that should this continue then it could be supportive of expectations that when oil and food price effects eventually drop out of the annual comparison, headline inflation is set to return back to its target in the medium term. The other inflationary indicators offered few surprises. RPI was in line and unchanged at +1.0% yoy while core PPI remains soft at +0.3% yoy (vs. +0.2% expected). Ultimately George believes that thus far the news on domestic price pressures has been incremental, but it may not take many more months until the Bank feels more convinced about the inflation outlook. He continues to see the first hike in May 2016 but risks may be skewed towards an earlier move.

Moving on, pressure on emerging markets continues to be a hot topic at the moment. Yesterday actually saw the Malaysian Ringgit (+0.43%) rebound shortly after we went to print but there’s been no shortage of weakness in Asian FX markets of late with declines since the Yuan moves generally in a 2 to 4% range. A story in the FT last night has caught our eye meanwhile after highlighting the surge in EM capital outflows over the past year. The article notes that total net capital outflows from the 19 largest emerging market economies has now reached $940bn in the past 13 months, which is double that which flowed out over three quarters during the 2008/09 crisis. The data is only as of end-July, so we’d expect the recent Chinese Yuan moves to have exaggerated the outflows.
Just before we run over today’s calendar, there were a couple of interesting developments in Greece yesterday. The ECB has taken the move to reduce the ELA ceiling available to Greek banks, cutting the facility by €0.7bn to €89.7bn. On top of this, yesterday also saw a Greek government council overseeing state asset sales sign off on the first privatization deal under PM Tsipras. They agreed to a 40-year concession for a German airport operator to run 14 regional airports, which is believed to raise €1.2bn. Yesterday we also got wind of the bail-out approval from parliaments in Austria, Estonia and Spain. There’ll likely be much attention on the Bundestag vote today.

Over to today’s calendar now, it’s a quiet session this morning in Europe with no notable releases although it’s all eyes on the US this afternoon when we kick off with the July CPI report, followed up later this evening with the FOMC minutes from the July 28/29th meeting. This will give analysts another chance to sharpen their liftoff expectations. Just on the US CPI data, market expectations are currently sitting at +0.2% mom for the headline, with DB’s Joe Lavorgna slightly less optimistic at +0.1%. Market consensus for the core is also at +0.2% mom, in line with Joe’s view.