Black Swan developing in China?

So, Bernanke managed taking the US indices to new levels as banks apparently now have adequate capital levels. Vol collapsed further, while investors feel risk is diminishing. From a technical point, market looks to be breaking higher, but something disturbing might be happening in China. The Chinese market slumped the most in 3 months today, but maybe now we don’t need the Chinese, as the LTRO has saved Europe, and US doesn’t need any help?

There is though a big potential black swan about to happen in China. The currency has been strolling along the one way path for quite some time now. Vol on the Yuan has collapsed, and everybody is doing the “obvious” trade, as the yuan must go only one way. The question is, are we reaching a point, where China will need to reverse that order, and let the yuan devalue (despite the politicians talking of an equilibrium here) as other countries all are engaged in the currency war game. That could actually turn out to be very interesting, especially as people are all one way in the yuan option trade. Six months yuan vol is at 2.5% now. We traded at 6% in october…Is the reversal of the yuan the next black swan? From Bloomberg;

China’s stocks fell, sending the benchmark index down the most in more than three months, after Premier Wen Jiabao said home prices are still far from reasonable levels.

The Shanghai Composite Index (SHCOMP) slumped 2.6 percent at the close, reversing an earlier 0.8 percent gain. Wen, holding his last regular press conference at the end of the annual National People’s Congress, said a relaxation of curbs on the property market would lead to “chaos.” A gauge tracking property stocks sank 3.7 percent, led by Poly Real Estate Group Co., while Anhui Conch Cement Co. paced losses by building-material companies.

“Wen’s speech has raised concern that property curbs may be kept in place for longer than previously expected,” said Zhang Ling, general manager at Shanghai River Fund Management Co. “Property accounts for a significant part of the economy.” (full article here.)