All eyes were on China overnight, where first the PBOC drained a quite substantial CNY 100 billion in liquidity via 14 day repos in the month following the biggest credit injection on record, pushing those worried about China's credit schizophrenia to the edge, and then things got even more bizarre when in an act of clear PBOC intervention, the CNY dropped to the lowest since August 2013 as concerns about the global carry trade's impact on China (as noted here previously) start to reverberate. We will have more to say about China's Yuan intervention, but what should be noted is that the Shanghai Composite has tumbled nearly 10% in the past week, and was down another 2% overnight and is once again just barely above 2000, a level it can't seem to get away from for years (which is fine: recall that the real bubble in China is not the stock but the housing market). Chinese property stocks dropped to 8-month lows as concern continues about bank's withdrawing some liquidity for the asset class.The USDJPY drifted along and after rising to a resistance level of about 102.600 has since slide just shy of its 102.20 support area which means US equity futures are now in the red, and concerns that the S&P 500 may not close at a new record high are start to worry the technicians.

In other news, touted profit taking and carry-over of the cautious sentiment regarding the recent advance by USD/CNY rate (rose to its highest level since August 2013), allied to the PBOC draining of CNY 100bln via 14-day repos resulted in the Shanghai underperforming its peers prompting a lower open in Europe. In turn, in spite of the Nikkei 225 settling higher following the record close on Wall Street (S&P), flight to quality flows buoyed demand for safehave assets and prompted squaring of long USD/JPY positions. Consequent USD weakness supported EUR/USD this morning, with GBP/USD also benefiting from comments by BoE's McCafferty who said that if GBP rises more BoE would then need to consider it strength when setting further monetary policy and that UK exports were not being affected by the strong GBP. Elsewhere, despite the lacklustre performance by stocks this morning, Bunds also traded lower, weighed on by the looming supply and good demand for the new 7y bond launch by the ESM. Going forward, market participants will get to digest the release of the latest House Price Index, Richmond Fed Manufacturing and Consumer Confidence reports. Also, the US Treasury will auction off USD 32bln in 2y notes.

Bulletin headline summary from BBG and RanSsquawk

• USD/CNY advanced to its highest level since August 2013 overnight, above the 200DMA line, amid speculation that the PBOC is engineering a temporary correction aimed at discouraging investor demand before widening the trading band in Q2 following the National People’s Congress on March 5th.
• Goldman Sachs revises ECB view and expects the central bank to ease in April after previously seeing rates on hold, sees around a 15bps cut to Refi rate and Deposit rate as most likely.
• BoE's McCafferty says if GBP rises more BoE would then need to consider its strength when setting further monetary policy.
• Treasuries steady as week’s $109b auction cycle begins with $32b 2Y notes; yielding 0.356% in WI trading after drawing 0.36% in January; 2Y FRNs and 5Y notes tomorrow with 7Y notes on Thursday.
• S&P 500 closed at record high yesterday while IG corporate calendar topped $10b, led by $8b in 7 parts from Cisco
• China’s yuan tumbled the most in more than a year and the Shanghai Composite dropped the most in five months on speculation PBOC wants an end to the currency’s steady appreciation
• Chinese property shares fell to an eight-month low as Industrial Bank Co.’s suspension of mezzanine financing for developers fueled speculation lenders may pare real- estate funding
• Ukraine will select a national unity government on Feb. 27, delaying a vote in parliament that had been planned for today, interim leader Oleksandr Turchynov said
• The office of Turkish Prime Minister Erdogan said alleged leaked conversations of him discussing hidden funds are fake -- a denial that was ignored by opposition leaders who called for his resignation
• S&P said a meeting between Obama and Geithner in 2011 just before the company was warned to expect a response to its downgrade of U.S. debt justifies its request to see White House communications to defend itself against fraud claims
• Sovereign yields mostly higher. EU peripheral spreads tighter. Nikkei +1.44%; Shanghai Composite falls 2%. European stocks lower, U.S. stock-index futures decline. WTI crude, gold and copper fall

US Event Calendar

• 9:00am: FHFA House Price Index m/m, Dec., est. 0.3% (prior 0.1%); House Price Purchase Index q/q, 4Q, est. 1% (prior 1.96%)
• 9:00am: S&P/Case Shiller Home Price Index 20 City m/m, Dec., est. 0.6% (prior 0.88%);
  • S&P/CS y/y,  Dec., est. 13.4% (prior 13.71%)
  • S&P/CS NSA, Dec., est. 165.5 (prior 165.8)
  • S&P/CS y/y, 4Q (prior 11.18%)
  • S&P/CS NSA, 4Q (prior 150.92)
• 10:00am: Consumer Confidence Index, Feb., est. 80 (prior 80.7)
• 10:00am: Richmond Fed Manufacturing Index, Feb., est. 5 (prior 12)
• 1:00pm: U.S. to sell $32b 2Y notes
• POMO 11:00am: Fed to purchase $2.25b-$2.75b in 2021-2024 sector

Asian Headlines

USD/CNY advanced to its highest level since August 2013 overnight, above the 200DMA line, amid speculation that the PBOC is engineering a temporary correction aimed at discouraging investor demand before widening the trading band in Q2 following the National People’s Congress on March 5th. At the same time, recent reports of Chinese lenders reducing lending to property developers, together with somewhat mixed macroeconomic data may have also contributed to the depreciation of the currency, creating two-way volatility. This morning, China's SAFE said that potential market factors may trigger 2-way capital flows and QE tapering may help relieve 'CNY appreciation pressure', adding that QE tapering has no big impact on Chinese capital flows.

EU & UK Headlines

Goldman Sachs revises ECB view and expects the central bank to ease in April after previously seeing rates on hold, sees around a 15bps cut to Refi rate and Deposit rate as most likely. Analysts also said that a likely cut in April should be interpreted as mostly cosmetic, aimed at buying time to better assess risk of outright deflation.

BoE's McCafferty says if GBP rises more BoE would then need to consider it strength when setting further monetary policy. (RTRS)
- Would consider slightly earlier rate rise if inflation pressure bigger than expected.
- Market expectations of first BoE rate hike in Q2 2015 'not unreasonable' and the risks of an earlier or later rate hike by the BoE 'reasonably well balanced'.

Talks between the Greek government and the Troika have stalled over the capital needs of the Greek banking sector, with the central bank estimating EUR 6bln requirements for the banking sector, and the Troika foreseeing EUR 20bln. (FT)

Germany is considering giving Greece more autonomy over reform decisions to take if it requires a 3rd bailout package. (Die Welt) This would result in the Troika having less influence and power on how Greece should reform.

UK BBA Loans for House Purchase (Jan) M/M 49972 vs. Exp. 47150 (Prev. 46521, Rev. 47086) - highest since September 2007.

Barclays preliminary pan-Euro agg month-end extensions: (+0.07y) (12m avg. +0.07y)
Barclays preliminary Sterling month-end extensions:(+0.05y) (12m avg. +0.06y)

US Headlines

President Obama will meet with House Speaker John Boehner (R-Ohio) Tuesday morning in the Oval Office, according to the White House. (TheHill.com)

The meeting comes just a week before the president is set to officially unveil his budget proposal, and ahead of a narrow window for legislative work before members of Congress head back to their districts to campaign.

Barclays preliminary US Tsys month-end extensions:(+0.12y) (12m avg. +0.07y) - Large extension is a result of the refunding auctions earlier this month.

Equities

Concerns over the slowdown in China weighed on basic materials sector, which in turn meant that the commodity heavy FTSE-100 index underperformed its peers, with the likes of Rio Tinto and Anglo American leading the move lower. In terms of other notable stock movers, French listed Vivendi shares fell around 5% after the company failed to match earnings estimates metrics.

This morning, Home Depot reported Q4 Adj. EPS USD 0.67 vs. Exp. USD 0.71

FX

Cautious sentiment stemming from concerns over the slowdown in China meant that USD/JPY and EUR/CHF traded lower this morning, with USD/JPY testing the 21DMA level to the downside in the process. Of note, 101.50 and 102.50 mark good size expiring option strikes. Elsewhere, after failing to make a convincing break above the 21DMA line, EUR/ GBP reversed and moved into negative territory following comments by BoE's McCafferty.

Commodities

IMF data showed that during January the Euro area raised gold holdings by 7.776 tonnes to 10,787.434 tonnes, while Turkey cut its gold holdings by 31.171 tonnes to 488.578 tonnes. (RTRS)

Indonesia took the first step yesterday towards easing its export tax on ore concentrates, in its first rollback of recent new rules, offering a reprise to firms who build smelters in the country. (RTRS)

A Pakistan-Iran gas pipeline has been delayed due to sanctions, with construction to be completed within 30-36 months after sanctions are lifted. (BBG)
Iran has denied a report it signed a deal to sell arms to Iraq. (BBG)

* * *

In conclusion, here is Jim Reid's overnight recap

Markets were certainly honey coated yesterday after a difficult start. After falling 5.8% from its record close on January 15th, the S&P 500 last night (+0.62%) clawed back these losses and intraday hit fresh record highs before selling off slightly into the close just shy of the all time highs. Meanwhile the Stoxx 600 (+0.6%) hit six-year highs and Crossover hit its lowest levels of the year and indeed this cycle. After a weak lead in from China, the eventual 15% rally in the Ukraine stock market seemed to help sentiment as did the recent steady stream of M&A activity. Indeed events in Ukraine continued to move at pace yesterday as Ukraine’s interim interior minister announced that an arrest warrant had been issued for Mr Yanukovych whose whereabouts is unknown. Later on yesterday Russia weighed in with PM Medvedev stating that the interim authorities in Kiev had conducted an, “armed mutiny,” and that Western support for the new authorities was an, “aberration of perception.” Meanwhile the EU foreign policy chief Catherine Ashton was in Kiev to meet Interm President Turchynov. Whilst concerns have been growing over the ability of Ukraine to meet its debt obligations if Russia withdrew its financial support the US said it was ready to give financial support to complement any future loan from the IMF.

Political tensions continue to ripple through many emerging markets and yesterday saw Egypt’s interim government resign unexpectedly amid continuing strikes and a shortage of cooking gas. The resignation comes at a bad time for the country as it prepares for a presidential election in the next two months.

Outside of EM, Italy yesterday saw new Prime Minister Matteo Renzi deliver a speech to the Senate before they hold a vote of confidence in his new government. In his speech he discussed a series of electoral and economic reforms he wished to enact however his speech was somewhat light on details. Whilst Renzi won the confidence vote in the 320 seat Senate with the vote coming in at 169-139, this is less than the 173 votes that his predecessor Enrico Letta achieved in a vote on December 11th leaving him with a smaller majority. A second vote will take place today in the Lower House where his majority should be larger give his PD party holds 293 of the 630 seats (vs 108 of the 320 Senate seats).

Overnight in Asia we've seen a broadly positive session as the Nikkei is +1.4% as we type and the Hang Seng +0.48%. The Chinese Yuan is seeing its largest fall YTD, down 0.27% against the dollar, with the Shanghai Composite down by around -0.25% and property stocks at 8-month lows as concern continues about bank's withdrawing some liquidity for the asset class.

Looking ahead to today, in Europe we have a busy spread of data with the final reading of German Q4 GDP numbers front and centre. Consensus is for a QoQ growth number of+0.4%, in line with the preliminary reading, and a YoY number of +1.4%. This Q4 number would continue to leave Germany as an outperformer within Europe compared to the Q4 preliminary readings we have for the likes of France (+0.3%), Spain (+0.3%) and Italy (+0.1%). On the German data we will also get the various components of the Q4 growth number with a general expectation that whilst private consumption will be weak (-0.1%) other factors such as export growth (+1.7%) and capital investment (+0.8%) will help the German economy to expand. Today will also see the European Commission issue its Winter Economic Forecasts, with Olli Rehn delivering the growth forecasts in a press conference at 12:45 GMT. In its last forecasts in November the Commission predicted +1.1% growth in 2014 for the Euro zone so it will be interesting to see how the Commission’s view on the economy has developed over the past quarter.

Over in the US we get a whole raft of official and S&P/Case-Shiller housing data for Q4 and December 2013. We will also have the February reading of the Consumer Confidence Index and the Richmond Fed Manufacturing Index. We will also hear from the Fed’s Tarullo who is speaking at the National Association of Business Economics annual policy conference and also Dudley who is speaking at a Basel event in New Zealand.