Nobody Expects the Chinese Inquisition

Team Macro Man are still giggling. That was the best joke all year. The Chinese were laughing so hard yesterday at the way the world fell for their "instant reval" joke even they couldn’t keep a straight face. After surpressing guffaws of laughter when they fixed today's spot respectably lower than yesterday's 6.8275, at 6.7980, they couldn't hold it in any longer and collapsed on the floor with tears pouring down their cheeks as they got their local mates to ramp usd/cny back up to 6.8225 area. Absolute class. Eat your heart out SNB, the world's central banks have just been given a masterclass in currency management. Traders throughout the world are now reconfiguring their screen setups to have a spot USD/CNY chart clearly visible, whatever asset they trade.

We are sure that the Chinese authorities have modelled their policy on those of the Spanish Inquisition...

Last Friday we mentioned that we had a feeling that today was going to be a Turnaround Tuesday and though there is debate as to whether this actually kicked off yesterday, making it a "Counter Monday" we feel there is a good chance that the roll-over continues and we see a new stress phase. This Chinese action has even provided us with a lovely exhaustion spike yesterday.

Commodities were first-in and true to form they are now first-out of this rally. As usual, much of this comes down to China and as this is written the headline "Aluminum Production Cuts Loom in China on Record Output, End of Yuan's Peg" has just hit the screens. The chart below shows Chinese net aluminium exports (white), bauxite imports (brown) and spot aluminium (green).

Chinese firms basically went out and bought spot when it was cheap and then proceeded to move back to buying bauxite (and processing aluminium at a, err... loss... *cough*) until the domestic credit party came to an end in March/April at which time they had to start exporting more finished aluminium products. This is unlikely to end well (exports up 6000%,+/- YoY) given that they are producing below cost. That, plus the China bid being pulled from the market is not helping this or many other industrial metals which are showing the same pattern of slowing imports and ramping exports as producers have to clear inventories.

The energy complex is not that much different - crude imports are up smalls but crude exports are massively down, whereas refined product exports are all up big - 107% for gasoline YTD, which just goes to show that all those cars that people are buying in China can't soak up world energy supply. A corollary of this is that crack spreads are likely to come under pressure as all these refined products move out into the market. All this output in need of a home is a stark reminder that the likes of Hendry and Chanos are probably not far from the mark when talking about some of China's overcapacity problems.

Elsewhere, whilst IFO and Swedish unemployment looked strong there are other signs of a bigger turn:

• Soothsayer-fest: Nearly all general risk assets are showing very strong "Soothsayer" turn signals maturing today. SPX, FTSE, DAX, EUR/USD, AUD/JPY, loads of them... Even gold had one 2 days ago. And even without the soothsayers, there are enough traditional technical signs in the system pointing to a roll over.

• Gold... GGUF? Not today it isn't.

• Equities for the past 11 years have fallen the week after June expiries (Hat tip to Nic).

• A US ex-investment bank has lowered its base metal and oil forecasts.

• G20 approaches and Mangler has already started hinting that there will be disagreement.

• Forward EONIA rates have been drifting higher as the market begins to worry about what happens to Euro repo markets when the ECB's 1yr LTRO rolls off on 1st July.

TMM is standing by...