Yuan

Two months ago, Tim Cook reportedly wrote Jim Cramer that everything was awesome with iPhone sales in China. Days later, channel checks appeared to call Cook's statement into question. Several day ago, one of Apple's component makers - Dialog Semi - issued cautious guidance strongly suggesting iPhone sales momentum was weakening. Apple's earnings produced disappointment as China sales rather notably fell (but was quickly dismissed by analysts as US sales rose) and now, perhaps most worrying of all, Taiwan’s Pegatron Corp - maker of Apple's next-gen iPhone 6S and iPad - has halted hiring in its Shanghai factory as workers note "sales of iPhone 6S have been disappointing."

It's a busy night in AsiaPac. The ubiquitous Japanese stock buying-panic at the open quickly faded. China weakened the Yuan fix quite notably and injected another CNY10bn of liquidity but news of the arrest of the President of China's 3rd largest bank and a graft investigation into Dongfeng Motor's general manager sparked greater uncertainty and Chinese stocks extended the losses from yesterday. Commodities had started to creep lower, with Dalian Iron Ore pushing 2-month lows with its biggest daily drop in 3 months, were extended when the Aussie central bank kept rates steady (as expected) but sparked turmoil in FX markets with forward guidance of th epotential for more easing.

We found something unexpected when skimming through the website of China's finance ministry.

The Fed is weighing the negative consequences of a strong dollar on corporate profits vs. unleashing inflation on the electorate, pressuring long term interest rates. We will soon see which negative scenario they favor and why.

Bitcoin is up 123% from its January lows and over 50% higher than its early-September (post-Bitcoin XT anxiety) lows when we first warned about the virtual currency's relationship with possible China outflows. Despite promises of easing capital controls (and the chaos in the Yuan market over the last few days), it appears the Chinese are not waiting for the other shoe to drop and as offshore Yuan tumbled, so Bitcoin surged above $340 this morning (rallying all the way back to unchanged YoY).

As the crackdown against Zexi was taking place, Shanghai police also arrested 3 suspects as they cracked a case of stock futures price manipulation involving over 11.3 billion yuan (US$1.8 billion), police said yesterday in a statement. According to Shanghai Daily, Yishidun, a commercial company registered in Jiangsu Province’s Zhangjiagang City in 2012, was found to use an illegal stock futures trading software to destabilize the market and profit from volatility.

• Baffle with BS: German Bonds Decline Along With Peers as Draghi Cools QE Talk (BBG)
• And yet... ECB's Nowotny says low inflation forces ECB to act (Reuters)
• Stocks fall on China data, but stronger euro zone lifts gloom (Reuters)
• Global factories struggle as stimulus fails to spur (Reuters)
• Russian airline rules out technical fault, pilot error in Egypt crash (Reuters)
• Turkey returns to single-party rule in boost for Erdogan (Reuters)

On a day full of Manufacturing/PMI surveys from around the globe, the numbers everyone was looking at came out of China, where first the official, NBS PMI data disappointed after missing Mfg PMI expectations (3rd month in a row of contraction), with the Non-mfg PMI sliding to the lowest since 2008, however this was promptly "corrected" after the other Caixin manufacturing PMI soared to 48.3 in October from 47.2 in September - the biggest monthly rise of 2015 - and far better than the median estimate of 47.6, once again leading to the usual questions about China's Schrodinger economy, first defined here, which is continues to expand and contract at the same time.

Ironically, it would only exacerbate the pressure and you can handsomely profit from it

Ok, this is China: crazy things happen all the time. But where things got outright ridiculous, was when moments ago when as China National Radio reports, Wu Shuang, a partner of Xu Xiang's at Zexi, and also an insider trading suspect, was shot and killed by Chinese police when he "resisted and tried to escape."

As per the fixing limits established as part of the August 11 Yuan devaluation, moments ago the PBOC announced that it had set the Yuan at a USDCNY fixing of 6.3154, a strengthening of a massive 0.54% - the most since 2005 - following the manic end of trading PBOC intervention on Friday that sent the Yuan soaring some 300 pips from 6.3475 to 6.3175.

Confusion reigns... China's Manufacturing PMI is in contraction according to both the Official and Markit/Caixin measures (but the former was flat and missed while the latter rose and beat "confirming economic stability" according to the 'official' press). Following the largest strengthening fix for the Yuan in 10 years, both the onshore and offshore Yuan are weakening by the most since the August devaluation. Finally, having cliff-dived at the open, Chinese stocks have bounced back to unchanged on the Ciaxin PMI beat (but US equities drift lower still).

The most anticipated economic release over the weekend was the early glimpse into China's manufacturing and non-manufacturing sectors via the two key PMI surveys released by China's National Bureau of Statistics, to get a sense if the slowdown across China is stabilizing or, as some have suggested, rebounding. It did not: overnight the NBS reported that the manufacturing PMI remained unchanged in October at 49.8 missing consensus estimates of a modest rebound to 50.0, its third consecutive month in contraction territory.

China as the global Bubble’s focal point – the weak link yet, at the same time, the key marginal source of Bubble finance. China’s policy course appears to focus on two facets: to stabilize the yuan versus the dollar and to resuscitate Credit expansion. For better than two decades, similar policy courses were followed by myriad EM policymakers in hopes of sustaining financial and economic booms. Many cases ended in abject failure – often spectacularly. Why? Because when officials resort to such measures to sustain faltering Bubbles it generally works to only exacerbate systemic fragilities. For one, late-stage reflationary measures compound Credit system vulnerability while compounding structural impairment to the real economy. Secondly, central bank and banking system Credit-bolstering measures create liquidity that invariably feeds destabilizing “capital” and “hot money” outflows.

• World stocks on course for best month in four years (Reuters)
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• U.S. Avoids Debt Default as Congress Passes Fiscal Plan (BBG)
• China naval chief says minor incident could spark war in South China Sea (Reuters)
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