Perhaps the biggest surprise about the overnight Chinese stock rout is which followed the lowest manufacturing PMI since March 2009, is that it happened despite repeat sellside pleas for a PBOC RRR cut as soon as this weekend: usually that alone would have been sufficient to push the market back into the green, and it almost worked when in the afternoon session stocks rebounded after dropping as much as 4.7% below the "hard" floor of 3500, but then a second bout of selling just before the close took Chinese stocks right back to the lows with the Shanghai Composite closing at 3,507, down 4.3% on the day, having wiped out the entire 18% rebound from July 8 when the PBOC first threatened both sellers and shorters with arrest. Which is probably why threats of harm had to be repeated: around closing time, the Chinese SEC said it was investigating major stakeholders of listed companies for illegally reducing holdings. At this point, such a rerun of China's farcical market control will likely only lead to more selling as the PBOC has clearly lost control. In the meantime, the sellside set the weekend stage with big hopes for a RRR cut as big as 100 bps which may be the catalyst for the next major leg lower because unless the PBOC delivers, the market will resume sliding on fears Beijing has finally given up on micromanaging and artificially pushing the stock market bubble higher. Case in point, via Bloomberg: Julia Wang, Hong Kong-based economist at HSBC: Economy’s recovery seems to have lost more momentum, reinforcing already weak market sentiment This will weigh on economic activity and labor conditions in coming months Expect further policy easing, including another 25 bp policy rate cut and 100 bp RRR cut in coming weeks Zhu Qibing, Beijing-based analyst at China Minzu Securities: Aug. flash factory PMI components reflect both weak domestic and external demand Further currency depreciation may not be the solution to lift Chinese exports, according to their relationship in recent years PBOC policy may not effectively transmit to real economy, but further RRR cuts needed to counter liquidity shortage Expect RRR cut at end of 3Q Jacqueline Rong, Beijing-based economist at BNP Paribas: Aug. flash PMI data reflects slowing property investment and manufacturing activities; infrastructure spending may have yet to pick up this month Slowing economic activity, together with equities’ performance, may risk 3Q GDP falling below 7% 7-day repo rate edging higher this week even after PBOC injected large amount of cash via OMOs and MLF; this suggests capital outflows may be accelerating Timing of another RRR cut is nearer, size of could 50-100 bps Nie Wen, economist at Huabao Trust: Yuan still has room to devalue as its REER is still relatively high vs other regional currencies Rising capital outflows are not a result of weakening yuan, but rather expectations for slowing economic growth PBOC easing is still much needed to counter the economic slowdown; another RRR cut may arrive as early as end of the month What may be the worst news for the liquidity addicts is that according to Bloomberg, Chinese President Xi was said to be mulling shifting priorities to population growth over GDP, according to sources which could result in lowering the hard GDP target of 7% to a flexible range of 6.5%-7%. It would also mean another step lower in the "new normal" default liquidity state for China, which would impact all asset prices too. In any case, with the Chinese cyanide-poisoned dead cat no longer bouncing and having reverted to peak intervention levels, the rest of Asia also got hammered: equities traded firmly in the red following the worst day in the S&P 500 since Feb'14 as the index turned negative YTD amid China growth fears, subsequently dampening sentiment for global stocks. Further pressure was seen in the Hang Seng (-1.5%). The KOSPI (-2.0%) saw its largest intraday fall in 3-yrs as tensions between North and South Korea take a turn for the worse, while the Nikkei 225 (-3.0%) and ASX 200 (-1.4%) has been weighed by financials with the latter trading at YTD lows. JGBs traded relatively flat despite the BoJ entering the market to purchase JPY 1.2trl of government debt. Over in Europe there has been a modest rally after opening off the worst levels, after some good PMI data was released out of Germany (if not France), as well as the growing expectation for further easing by the PBOC and even outside calls of potential pricing in of QE2 by the ECB, stocks in Europe remain mildly in the red (Euro Stoxx: -0.1%). Still, as the following chart shows, August has been the cruelest month for the DAX, which is down 8%, on track for the worst month in 4 years. Blood on the DAX. German stocks -8% so far in August, on track for the worst month in 4 years: pic.twitter.com/bsBGWn0UmH — Jamie McGeever (@ReutersJamie) https://twitter.com/ReutersJamie/status/634665630973693952!function(d,s,id){var js,fjs=d.getElementsByTagName(s)[0],p=/^http:/.test(d.location)?'http':'https';if(!d.getElementById(id)){js=d.createElement(s);js.id=id;js.src=p+"://platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs"); In fitting with this, Bunds opened lower amid the equity weakness to briefly trade above the 61.8% retracement between the April high and June low at 155.87 and at their highest level since the beginning of May, however the break was not sustained and Bunds have come off their high in line with a mild recovery in stocks to trade flat heading into the North American crossover. US equity futures have seen strength throughout the European session to pare much of the losses seen in yesterday's session, although there has been a bout of renewed selling in the last few minutes. Today's notable US earnings include Deere & Co. and Footlocker, while also of note S&P Aug'15, Nasdaq June'15 and DJIA June'15 and T-Notes Sep'15 options all expire today. FX markets have seen EM currencies remain under pressure this morning in reaction to weaker than expected manufacturing data out of China, as well as the ongoing selling pressure in energy and metals markets . USD/RUB trades close to its highest level since Jan'15, USD/IDR at highest level since 1998 and USD/TRY also trades close to record levels. At the same time, risk averse flows and unfavourable yield differential flows meant that USD/JPY remains on the downward trend and has broken the key 100DMA line seen at 122.30. Despite weakness in the USD, the energy complex remains soft as WTI crude futures remain under pressure despite regaining the USD 41/bbl level, on track for its 8th consecutive weekly decline , while NatGas futures are on trac for their first weekly drop of the month. Elsewhere, gold has benefitted overnight from safe haven flows to head into the North American session higher on the week by over USD 30.00. In summary: European shares remain lower with the health care and financial services sectors underperforming and autos, chemicals outperforming. Asian stocks fall for a 6th day as Chinese manufacturing PMI misses estimates at lowest since March 2009. Yuan declines, Shanghai Composite erased rebound since July 8 low. Chinese President considering shifting priority to population growth over GDP, person familiar says. Kospi falls to two-year low as won declines amid Korean tensions. Greek PM resigns, calls for early elections to bolster power base. Oil falls, posed for longest weekly losing streak since 1986. French manufacturing PMI below estimates, euro- area, German manufacturing above. U.K. posts first July budget surplus since 2012. The Swiss and Dutch markets are the worst-performing larger bourses, the Swedish the best. The euro is stronger against the dollar. Greek 10yr bond yields rise; Italian yields increase. Commodities decline, with zinc, nickel underperforming and gold outperforming. Market Wrap U.S. manufacturing PMI due later. S&P 500 futures down 0.2% to 2020.8 Stoxx 600 down 1.3% to 368.6 US 10Yr yield up 1bps to 2.08% German 10Yr yield up 1bps to 0.59% MSCI Asia Pacific down 2.2% to 131.3 Gold spot unchanged at $1151.7/oz Eurostoxx 50 -1.1%, FTSE 100 -1%, CAC 40 -1.2%, DAX -1%, IBEX -1.1%, FTSEMIB -1%, SMI -1.6% Asian stocks fall with the Sensex outperforming and the Shanghai Composite underperforming; MSCI Asia Pacific down 2.2% to 131.3 Nikkei 225 down 3%, Hang Seng down 1.5%, Kospi down 2%, Shanghai Composite down 4.3%, ASX down 1.4%, Sensex down 0.9% Euro up 0.36% to $1.1282 Dollar Index down 0.54% to 95.46 Italian 10Yr yield up 6bps to 1.88% Spanish 10Yr yield up 3bps to 2.02% French 10Yr yield up 2bps to 0.97% S&P GSCI Index down 0.8% to 352.3 Brent Futures down 0.8% to $46.3/bbl, WTI Futures down 0.7% to $41/bbl LME 3m Copper down 1.8% to $5029/MT LME 3m Nickel down 2.2% to $10180/MT Wheat futures down 0.7% to 507.5 USd/bu Bulletin Headline Summary from RanSquawk and Bloomberg Despite coming off the worst levels of the session, stocks in Europe remain mildly in the red Risk averse flows and unfavourable yield differential flows see USD/JPY remain on the downward trend and has broken the key 100DMA line seen at 122.30 Looking ahead, market participants will get to digest the release of the latest Canadian CPI and retail sales data and US manufacturing PMI as well as earnings from Deere & Co. and Footlocker Treasuries steady overnight, 5Y and 10Y yields headed for biggest weekly decline since June as stocks, commodities and EM currencies slide on China growth concern. A Chinese manufacturing gauge fell to lowest in more than six years, following weaker than expected data on investment, industrial output, retail sales and exports in July While the S&P 500 has been a source of stability amid China’s slowdown, Greece crisis and EM currency plunge, the benchmark fell the most in 18 months yesterday while the VIX has soared 49% this week alone A group of Greek lawmakers opposed to the country’s bailout program abandoned the governing party, Syriza, as Tsipras moved to force an early election to shore up his position. Aipac, which has long had an outsized reputation for clout and effectiveness, is rapidly losing ground in its biggest test as it mounts an all-out campaign to kill Obama’s nuclear deal with Iran. An investigation led by the FBI is probing how sensitive information got to personal e-mail accounts used by Hillary Clinton and some of her top aides and housed on a server at her New York home, according to two officials with knowledge of the inquiry who asked for anonymity Sovereign 10Y bond yields higher. Asian and European stocks slide, U.S. equity-index futures decline. Crude oil and copper lower, gold little changed US Event Calendar 9:45am: Markit US Mfg PMI, Aug P, est. 53.8 (prior 53.8) DB's Jim Reid completes the overnight market recap It looks like we're seeing something akin to the taper tantrum developing at the moment with global markets in a fragile way. It’s difficult to assess how much is Fed related and how much is China though. Given that the odds of a September hike are fading again (32% this morning, down 16% over the last 48 hours) China and the impact on EM is the overriding driver. Any hopes that we might see a rebound in Asia this morning are being dashed as we reach the midday break, with markets turning their focus to a weak flash manufacturing PMI number out of China (47.1 vs. 48.2 expected), falling 0.7pts from July and to the lowest level since March 2009. That’s helped fuel a sea of red across our screens with losses again being led out of China where the Shanghai Comp (-3.04%) and Shenzhen (-3.86%) have both moved a steep leg lower. The Nikkei (-2.30%), Hang Seng (-2.32%), Kospi (-1.89%) and ASX (-2.09%) have all followed suit also, while Asia credit is around 6bps wider this morning. S&P 500 futures (-0.5%) are also pointing to a weak start. Asian currency markets are showing no let up either from the recent weakness. The Malaysia Ringgit in particular has tumbled over 1%, while Korea, Indonesia and Philippines currencies are around half a percent lower. Meanwhile Treasury yields have resumed their decline with the 10y down another 2bps. One of the big problems with China's FX move is that although they've 'only' seen a 3% currency fall (in the onshore Yuan) since their announcement last week, others have subsequently followed suit either deliberately or via market pressure. The following countries have seen their currency depreciate at least 4% since last Monday (and using last night’s closing prices): Kazakhstan (leading the way with a huge 26% devaluation following the removal of the trading band), Russia, Ghana, Guinea, Colombia, Belarus, Turkey, Malaysia and Algeria. In fact, if we extended the analysis to include those that have seen at least a 3% depreciation then the number of countries hits 17 and unsurprisingly all sit in the EM bracket. Every day it feels like we’re hitting fresh cycle lows for a currency somewhere with yesterday’s highlights being the Turkish Lira briefly sliding past 3 against the Dollar for the first time ever, the South African Rand breaching a level not seen since 2001, the Ruble weakening to the lowest level since February and the Malaysian Ringgit returning to a 17-year low. So whatever their intentions the Chinese have created an air of fragility around the globe. Markets now surely have to firm up considerably for the Fed to pull the trigger next month. We stand by our long-term view that they'll struggle to raise rates this year but acknowledge that if calm does breaks out they wouldn't require much to pull the trigger. Investors yesterday seemed to interpret the more dovish FOMC minutes from Wednesday as more of a sign of concern about the global economy than rejoice in hopes of easier policy. It was interesting that the S&P 500 (-2.11%) had its worst day since February 3rd 2014 and returned to negative territory for the year, breaking a seven-month very tight range on the downside. The Dow (-2.06%) fell to levels seen last October and it’s clear that US equities have made hardly any progress since QE ended. This helps support our view that a large part of the gains in equities in recent years has been central bank liquidity related. Back to yesterday, there was plenty of weakness in European equity markets too as we saw the Stoxx 600 tumble 2.06% and now 7.5% off the highs earlier this month. The thin liquidity at the moment is helping some of these material moves while the Oil complex continues to remain volatile. Yesterday we saw WTI (+0.12%) actually finish a tad higher and bounce off Wednesday’s lows but the same couldn’t be said for Brent which declined 1.15% to $46.62/bbl and the lowest close now since January 13th. Both have tumbled some 1.5% this morning though. The rest of the commodity complex actually had a reasonably strong day yesterday. Copper (+2.48%) rebounded back above $5000, while Aluminum (+1.19%), Zinc (+1.74%) and much of the precious metals space rose, with Gold in particular up 1.62% and quietly up nearly 5.5% MTD now. Along with Gold, Treasuries also benefited from a decent bid yesterday with markets firmly in risk-off mode. The 10y moved another decent leg lower with the yield down 5.8bps at the close to 2.069%, the lowest closing yield since April 30th. The US data flow didn’t really offer too many surprises and at the margin was relatively positive. With some concerns that we might see a soft reading post the NY Fed manufacturing survey, the Philly Fed manufacturing survey for August signaled some improvement, rising 2.6pts to 8.3 and ahead of consensus estimates of 6.5 with some notable improvements in the employment and shipments indices. Initial jobless claims rose 4k last week to 277k (vs. 271k expected) while the four-week average rose to 272k, although still below where it was last week. Meanwhile the run of decent housing data continues with existing home sales for July up 2.0% mom, after forecasts for a fall of 1.1%. That lifted the annualised rate up to 5.59m from 5.48m last month and to the highest level since February 2007. The one weaker print yesterday came in the form of the July conference board’s leading index which declined 0.2% mom last month after forecasts for a +0.2% rise. Just while we stay in the US, one notable upcoming date to keep an eye on is the Jackson Hole meeting on August 27th-29th. With Fed Chair Yellen skipping the event, the news yesterday that the Fed’s Fischer will be speaking at the event in a panel discussion on the Saturday (29th). This could well be one of the last important Fedspeak views we hear prior to the September FOMC meeting (16th-17th). Closer to home yesterday, aside from an in-line German PPI reading for July (0.0% mom), enough to leave the annualized rate at -1.3% yoy data flow was again centered around the UK and retail sales in particular. The July headline reading of 0.1% mom (vs. +0.4% expected) was below expectations but the annualized rate remained unchanged at a solid 4.2% yoy. Meanwhile CBI total trends orders for August was better than expected (-1 vs. -10 expected), rising 9pts from July. Yesterday's EMR suggested that an autumn time-frame for a Greece snap election was looking likely, well following Greek PM Tsipras’ resignation yesterday it looks like that time-frame could be revised possibly to a September 20th date as per various wires this morning. Reaction from European officials so far has been relatively positive with the Eurogroup Chair Dijsselbloem saying that he hopes the elections will lead to even more support in the new Greek parliament for the new programme. In any case it looks like the Greek political situation will all be coming to a head once again pretty soon. Looking at today’s calendar now, we see more August flash PMI’s for Europe this morning with the readings for the Euro area, Germany and France in particular. We’ll also get some confidence indicators data for the Euro area and Germany as well as more data out of the UK with public sector net borrowing readings. It’s a quiet end to the week in the US meanwhile with just the flash manufacturing PMI print.