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.

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