Yuan

We are nearing a crucial inflection point in the worldwide bubble finance cycle that has been underway for more than two decades. To wit, the world’s central banks have finally run out of dry powder. They will be unable to stop the credit implosion which must inexorably follow the false boom.

Following Friday's further freefall in crude oil prices, The Middle East is opening down notably. Abu Dhabi, Saudi, and Kuwait are lower; Israel is weak and UAE and Qatar are tumbling, but Dubai is worst for now.  Dubai is down for the 6th day in a row (dropping over 3% - the most in a month) extending the opening losses to 2-year lows. The 11% drop in the last 6 days is the largest since the post-China-devaluation global stock collapse. Leading the losses are financial and property firms.

China’s sweeping crackdown on sellers, “manipulators”, frontrunners, financial journalists and anyone else “suspected” of acting in such a way as to sow fear and uncertainty in the wake of the dramatic meltdown in Chinese equities that unfolded over the summer has ensnared money managers, high profile executives, and government officials alike. Earlier this week, it reached a crescendo with the disappearance of Guo Guangchang, known to some as “China’s Warren Buffett. We now have a bit more in the way of color regarding Guo’s detention and sure enough, he’s being “held in connection with an investigation.”

When we first detailed the link between a devaluing currency, increasing restrictions on outflows of China capital, and Bitcoin, the virtual currency soared (driven by Chinese flows, just as predicted). The last few days, as China has once again started devaluing its currency, authorities once again moved to tighten capital outflows - this time through caps on credit-card withdrawals (as warned here) - and sure enough, Bitcoin has been soaring recently. Specifically, a nationwide crackdown on illegal UnionPay point-of-sale devices, has sparked capital flight (on heavy volume) through the vurtual currrency.

What the PBOC's unexpected announcement means, is that for anyone who thought the Yuan devaluation is over, now that the currency is at the lowest level relative to the dollar since 2011, the reality is that the devaluation relatively to everyone else is only just starting.

We have been almost alone in our exclamations at the collapsing offshore Yuan in the last few days but since The IMF blessed China's currency with inclusion in The SDR, CNH is down 13 handles. However, now we appear to have an answer. Overnight saw commentary from CFETS (China's FX market 'manager') that indicated implicitly that Trade-Weighted Yuan was still trading too high.

"The Fed will drive home the lower and slower mantra. That is all spin, signifying nothing... There are so many unknowns, good and bad. Either way, absolutely ignore the "it’s priced in" claims... The Fed is going to raise rates next week, and anyone who claims it is not a huge deal is fooling you, as well as themselves."

• Futures down sharply as oil hits seven-year low (Reuters)
• Oil slides to new seven-year low as IEA warns of worse glut (Reuters)
• But... but... they all said... Cheap Oil Gives Little Help to U.S. Spending (WSJ)
• Disappearances in China Highlight Ruling Party Detention System (BBG)
• China’s Credit Rebounds as Stimulus Helps Boost Loan Demand (BBG)
• Junk Fund’s Demise Fuels Concern Over Bond Rout (WSJ)

It was a relatively calm overnight session in which European stocks wobbled modestly, Japan was up, China was down following its weakest fixing since 2011 as the PBOC continues to aggressively devalue since the SDR inclusion (stoking concerns capital outflows are once again surging), EM stocks stocks were weak and the dollar was unchanged ahead of today's retail sales data and next week's Fed meeting, and then suddenly everything snapped.

USDCNY broke above 6.4500 for the first time since the August devaluation, extending its post-IMF plunge to 6 days. This is the largest and longest streak of weakness since March 2014 as China seems to have taken the SDR-inclusion as blessing to devalue its currency drip by drip. Default risk is once again stomping higher as CDS surge from 94bps to 112bps (2-month highs). The biggest news in China tonight is the disappearance of Fosun International's Chairman, China's 17th richest man (and the collapse in the company's bonds, since stocks are suspended).

"Corporate balance sheet deterioration may well be a theme in 2016, raising market concerns, in our view. A mirror image of that is the rise in bank non- performing loans. Our contacts among the banks seem increasingly concerned about the NPL issue in 2016."

The next financial crisis could manifest itself in the coming months. If so, it will mark the end of current central bank monetary policies and state control of markets, as free markets reassert realistic pricing. Government bond yields will normalise, stock markets will fall, and banks will almost certainly fail. When something as epochal as this happens, we can expect the macroeconomic establishment to be clueless with respect to the problem itself and its scale.