Yuan

For the second time this year, China's GDP deflator turned negative, meaning that in addition to any deliberate misrepresentations, Beijing may also be overstating GDP by way of a statistical shortcoming. Ultimately, they're habitually understating inflation for domestic output which means that "real" GDP is probably less "real" than nominal GDP. 

The LBMA wants to boost transparency and invited the market to suggest improvements including considering a new electronic platform that may lower trading costs and improve efficiency.

While the macro watchers were keenly awaiting China's macroeconomic data dump on Sunday night, which was far worse than reported (as we will show shortly), a just as notable development was taking place in China's microeconomic world, where as the FT reported on Sunday, China's state-owned SinoSteel, the country's second largest importer of iron-ore, and a major miner and steel trader (yes, another commodity trader) was "poised to default on its bonds this week, the latest test of whether Beijing is willing to impose market discipline on national champion companies."

• Great News: China’s GDP Growth Beats Forecasts as Stimulus Supports Spending (BBG)
• Oh wait, maybe not: China GDP: Deflategate Comes to Beijing (WSJ)
• Actually, definitely not: Shanghai rebar falls to record low after weak China GDP (Reuters)
• But who cares: European Shares Gain on Earnings as Bonds Drop, Metals Decline (BBG)

AsiaPac stocks were generally lower heading into the all-important Chinese macro data (S&P -6pts, Japan -0.7%, China -0.2%) as JPY erased Friday's ramp and crude dropped back below $47. The PBOC left the Onshore Yuan fix practically unchanged (following Friday's significant devaluation). Then the data hit... China GDP beat expectations (printing 6.9% YoY vs 6.8% exp) but is still the lowest growth since Q1 2009. Industrial Production missed (printing 5.7% YoY vs 6.0% exp). Retail Sales beat (10.9% YoY vs 10.8% exp). The initial reaction was kneejerk buying in USDJPY and stocks but that is fading as "good news" will relieve The Fed's angst over growth...

In the absence of any key economic developments in the Asian trading session, Asian stocks traded mostly under the influence of the late, pre-opex US ramp momentum courtesy of another day of ugly economic data in the US (bad econ news is good news for liquidity addicts), closing solidly in the green across the board, led by China (+1.6%) and Japan (+1.1%) thanks in no small part to the latest tumble in the Yen carry trade, which mirrored a bout of USD overnight weakness. And since a major part of the risk on move yesterday was due to Ewald Nowotny's comments welcoming more QE, news from Eurostat that Eurozone CPI in September dropped -0.1% confirming Europe's deflation continues, should only be greeted with even more buying as it suggests further easing by the ECB is inevitable.

After two days of relative USD carnage in and across the emerging and asian FX markets, early AsiaPac trading this evening is seeing that trend revert with the Ringgit, Rupee, and Lira sliding. After-hours gains in US equity futures have been erased, despite USDJPY's continued BoJ-aided push higher (though it seems 119.00 is the new ceiling for now). China's government bonds remain extraordinarily bid (outperforming TSYs by almost 60bps in the last few weeks) with yields dropping to 6-year-lows, as corporate bond bubble fears rotate modestly back to govvies. Aussie miners are under pressure with Iluka Resources getting hammered on "excess capacity" warnings.

News That Matters

• China economic growth seen slowing despite policy easing (Reuters)
• FBI, Justice Department Investigating Daily Fantasy Sports Business Model (WSJ)
• Obama to slow pace of withdrawal of U.S. troops from Afghanistan (Reuters)
• Corporate America's Epic Debt Binge Leaves $119 Billion Hangover (BBG)
• Islamic State battles insurgents as Syria army prepares assault (Reuters)
• Why Hillary Clinton Can’t Win by Going After the NRA (BBG)

In the four or so weeks after the August 11 China deval, all anyone wanted to talk about was FX reserves. Goldman has endeavored to tally up currency intervention as a percentage of reserve money in Asia during what they’re calling the “China tantrum”. Note the rather scary looking figure for Malaysia.

The single most important “unknown unknown” today is any random event that may unexpectedly cause global central banks to withdraw their stated support of markets. Moral hazard has contributed to a significant build up in short and leveraged volatility creating a shadow ‘volatility gamma’ that reinforces the current trend in volatility direction. Rising volatility is followed by more rising volatility and vice versa. The pattern is creating a pro-cyclical monster of short volatility that, if left unchecked will contribute to a repeat of the May 2010 Flash Crash or 1987 Black Monday Crash. August 2015 was just an appetizer.

If we, and Bloomberg, are correct, and if the CFD unwind has only just started impacting the true supply/demand dynamics, and thus price, of copper, then we are only 30% of the way through the unwind of China's copper "carry trade" and thus the 'over-capacity' concerns are massively under-appreciated.

Capital Economics "expects gold could hit $1,200 before the end of this year, rising to $1,400 by the end of 2016”

Gold had a busy night as China's significantly weaker Yuan 'Fix' sent the precious metal higher top test the 200-day moving average and Europe's open (Asia's close) sparked a modest flash-crash retracing the entire move.

AsiaPac stocks are extending losses in early trading asit appears our fears about the Chinese coporate bond market bubble are also on the minds of Chinese regulators as they look to "boost reforms." After the PBOC has fixed the Yuan stronger for 8 straight days, the onshore and offshore Yuan has weakened appreciably in the last 24 hours and PBOC has devalued Yuan by 177pips  - the biggest in 2 months (as PBOC researchers push to "speed up Yuan internationalization" and implicitly inclusion in the SDR basket).