China's Central Bank Silence Risks Derailing The Global Economic Recovery

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It is remarkable that China's central bank has been unable or unwilling to contain the spike in short-term rates, as the interbank liquidity squeeze continues. This is roughly the equivalent of the Fed not being able to control the fed funds rate. You can certainly have fluctuations, but within a couple of days a major central bank should be able to inject enough liquidity into the system to bring down rates - unless of course the central bank wants the rates higher.

Something is amiss here. China is risking a recession unless the PBoC can bring this under control. Both the repo and the SHIBOR rates have risen to new highs in the past few days.

Reuters, Sober Look

Sober Look

Some have suggested that the PBoC is in fact trying to tighten liquidity in the financial system in order to put the brakes on the rapidly growing shadow banking sector (see discussion). While an admirable goal, creating a liquidity squeeze in the banking system and sending short term rates to multi-year highs is NOT the way to achieve that. This is especially scary in the face of an already "moderating" economic growth.

Reuters: - China's short-term funding costs surged on Wednesday, with the benchmark money market rate hitting a multi-year high, and authorities postponed the market's close by 30 minutes to give banks extra time to complete their borrowing.

The money market squeeze that began early this month has worsened this week, forcing banks and other financial institutions to trim non-essential businesses, such as wealth management and arbitrage, traders said.

That response may be welcomed by the central bank, which has adopted a hawkish stance towards market liquidity since May, partly to clamp down on an increase in risky shadow banking activities, traders said.

...

The interbank market decided to extend the trading time to 5 pm as many banks failed to obtain enough short-term money needed for business at the normal closing time of 4:30 pm, traders said.

Such trading extensions have occurred several times recently amid the acute squeeze, traders said. "Everybody is disappointed at the central bank's non-action," said a dealer at an Asian bank in Shanghai.

It's not clear if people fully appreciate the potential impact of this liquidity squeeze - including folks at the PBoC. This is not a game. These tight conditions and high rates over a longer period can easily derail lending activities across the country while potentially putting a number of financial institutions at risk and sending the economy into a tailspin. With the Eurozone still struggling in the aftermath of the crisis, let's see what a recession in China (12% of world's GDP) can do for global growth. Mr. Bernanke and company may need to go back to the drawing board very soon.

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The Moment During The Press Conference When Bonds Started Melting Down, And Bernanke's Intentions Became Clear

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STOCKS CRUMBLE AND RATES SURGE AFTER BERNANKE SPEAKS: Here's What You Need To Know (DIA, SPY, QQQ)

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Chinese Stocks Tumble After Disappointing Manufacturing Report And Amid Credit Crunch

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10 Things You Need To Know Before The Opening Bell (DIA, SPY, QQQ)

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A demonstrator jumps over trash set afire during protests against poor public services, police violence and government corruption, in Sao Paulo on June 18, 2013.

Good morning. Here's what you need to know.

Markets in Asia got slammed in overnight trading. The Japanese Nikkei 225 fell 1.7%, the Hong Kong Hang Seng fell 2.9%, and the Shanghai Composite fell 2.8%. European markets are in the red across the board, with France and Germany taking it the worst, both down 2.5%. In the United States, futures point to a negative open.Gold is tanking this morning. The shiny yellow metal is down more than 5% today. It's been falling since Federal Reserve Chairman Ben Bernanke's press conference yesterday, in which he suggested that quantitative easing could be completely finished by mid-2014, but the selling really got started overnight and a lot of the damage has been done this morning in European trading. Right now, it's trading right around $1300, but it hit a low of $1285 earlier.HSBC's flash China PMI survey revealed that the contraction in Chinese manufacturing accelerated in June. The headline index fell to 48.3 (a 9-month low) from 49.2 in May. Economists predicted just a slight tick down to 49.1.In the week ended June 14, Japanese investors sold ¥402.5 billion of foreign bonds, up from ¥394.4 billion in the previous week, and sold ¥129.9 billion of foreign stocks, down from ¥221.8 billion the week before. Meanwhile, foreign investors bought ¥313.3 billion of Japanese bonds after selling ¥280.0 billion in the previous week, and sold ¥3.6 billion of Japanese stocks after buying ¥115.4 billion the week before. The dollar is trading up 1.3% against the yen this morning, around ¥97.80.Markit's flash eurozone PMI survey indicated that business conditions continue to deteriorate in June, albeit at the slowest pace of contraction in 15 months. The headline index rose to 48.9 from 47.7 in May, exceeding consensus estimates for a smaller advance to 48.1. In Germany, however, manufacturing PMI fell to 48.7 from last month's 49.4 reading, indicating an accelerating pace of contraction in the eurozone core.British retail sales jumped 2.1% in May after falling 1.2% in April. Economists were only predicting a gain of 1.0%. Year over year, retail sales were up 2.1% in May, a big increase from April's 0.6% annual rate.Weekly jobless claims figures are due out in the United States at 8:30 AM ET. Economists predict initial claims for the week ended June 15 rose to 340,000 from 334,000 in the previous week. Continuing claims for the week ended June 8 are expected to have fallen to 2.958 million from 2.973 million in the previous week.Markit's flash U.S. PMI survey, due out at 8:58 AM, is expected to reveal that the pace of expansion in American manufacturing accelerated in June. The headline index is expected to rise to 52.7 from May's 52.3 reading.May U.S. existing home sales data are released at 10 AM. Economists predict existing home sales grew 0.6% in May after rising 0.6% in April.The Philadelphia Fed's monthly report on regional business conditions is also out at 10 AM. Economists predict the survey's headline index rose to -2.0 in June from -5.2 in May, indicating continued deterioration of conditions, albeit at a slower pace than in May. Follow all of the data LIVE on Business Insider > Follow 10 Things Before the Opening Bell and never miss an update! Get updates in your Facebooknews feed.

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Markets tanking around the world, China contraction worsens, and gold has another spectacular crash!

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