Following yesterday’s perfectly expected, yet totally shocking Brazil downgrade to junk status by the S&P, the Emerging Market took its next leg down over concerns that the so far relatively contained BRIC contagion will spread to the rest of the Emerging Markets. The result was that Malaysia’s ringgit, Indonesia’s rupiah and South Korea’s won all lead Asian currencies lower as regional equities initially dropped in a kneejerk response to the news while the New Zealand Dollar crashed by 2% after the RBNZ was the latest central bank to cut rates for the third time in three policy meetings.

The economic weakness stretched over to Japan, whose corporate goods price index plunged the most since 2009 while its machinery orders crashed -3.6% on expectations of a +3.0% rebound putting in play another Japanese recession scenario (its 5th in the past 7 years). The early result was a plunge in the Nikkei dragged lower by USDJPY (which also impacted US equity futures down), and then the Yen crashed, and the USDJPY soared instantly, when Japan had no choice but to pull out the QE card after Bloomberg headlines hit just before 1am eastern that ruling Liberal Democratic Party lawmaker Kozo Yamamoto, one of Japan’s permadoves who has advised Prime Minister Shinzo Abe on economic policy, said the BOJ should boost QE – again – and increase annual pace of asset purchases by at least 10t yen, adding that the BOJ’s Oct. 30 meeting would be “good opportunity” for further easing. And just like that horrible news is great news again.

The result is shown in the chart below: the USDJPY surged, then faded all gains, then proceeded to rise again and to trip all the upside stops set by the earlier spike…

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… in the process dragging S&P from 1935 early in the session as high as 1966: a 30 point move on no liquidity, and no news, just more hope that the global economy is so bad, more easing will be required.

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The move in S&P500 equity futures higher due to USDJPY correlation algos was so violent, the E-Mini was halted for 20 seconds at 6:12:45 am Eastern as central banks apparently don’t know their own strength.

All this happened just as China’s central bank once again intervened in the FX market, the offshore Yuan this time, when after devaluing the onshore Yuan the most in 4 weeks, “someone” scrambled to send the offshore Yuan soaring, and the USDCNH plunging by the most on record.

According to Reuters, China’s yuan shot higher in offshore markets on Thursday on suspected intervention by Chinese state banks, putting the offshore rate on track for its biggest daily gain on record. The intervention caught the market wrong-footed and was seen by traders as another bold gesture by Chinese authorities to shake out speculators and dampen expectations for further depreciation in the yuan following its devaluation in August.  The offshore yuan spot rate strengthened more than 1 percent to 6.39 per dollar from 6.4698 earlier in the day as the suspected intervention prompted those betting on yuan depreciation to cover their positions. 

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At this point it has become virtually impossible to differentiate between actual central bank intervention, hopes of central bank intervention, and how the two interplay on what was once the “market” but is now merely the place where money printers duke it out every day in some pretense of price discovery set by those who literally print money.

Elsewhere in Asia equity markets traded lower following the weak close on Wall Street as indices were pressured by a slump in commodities. Nikkei 225 (-2.5%) underperformed amid profit taking following yesterday’s stellar gains where it posted its best day since 2008, while the unexpected decline of Japanese core machine orders (-3.60% vs. Exp. 3.00%) which printed its lowest since November 2014, added to the negative tone. ASX 200 (-2.4%) and Chinese bourses (Shanghai Comp. -1.4%) traded in negative territory, weighed heavily by the energy sector, following the declines seen in crude. JGBs traded in positive territory as the risk off sentiment in the region boosted demand for safer assets, while the 5yr JGB auction failed to trigger price action in the 10yr after b/c (3.49 vs 3.45) and tail in price printed relatively in line to the prior reading. Chinese Premier Li said China is to expand domestic demand and is to have a more active policy in regards to imports. Li added that China is to set up a cross border CNY payment system and is to allow foreign banks in its onshore forex market.

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