Yuan

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).

News That Matters

As Asia opened last night, gold and silver came under pressure (ahead of China's biggest Yuan strengthening since November 2014). As US re-awakens from Columbus Day vacation, it appears demand is back (and in heavy volume) for precious metals...

• Playboy to Drop Nudity as Internet Fills Demand (NYT)
• Stock futures fall on weak China trade data (Reuters)
• Any Hall is down 20% YTD (WSJ)
• Global Stocks Slide With Metals After Chinese Imports Tumble (BBG)
• Clinton's tack to the left to be on display in Democratic debate (Reuters)
• Switzerland Said to Impose 5% Leverage Ratio on Big Banks (BBG)
• AB InBev, SABMiller brew up $100 billion deal (Reuters)

For the past two weeks, the thinking probably went that if only the biggest short squeeze in history and the most "whiplashy" move since 2009 sends stocks high enough, the global economy will forget it is grinding toward recession with each passing day (and that the Fed are just looking for a 2-handle on the S&P and a 1-handle on the VIX before resuming with the rate hike rhetoric). Unfortunately, that's not how it worked out, and overnight we got abysmal economic data first from China, whose imports imploded, then the UK, which posted its first deflation CPI print since April, and finally from Germany, where the ZEW expectation surve tumbled from 12.1 to barely positive, printing at just 1.9 far below the 6.5 expected.

After an initial knee-jerk reaction (perhaps on better-than-expected exports - signalling perhaps the devaluation 'worked), AsiaPac stocks are tumbling rapidly as the 11th monthly decline in imports (down a stunning 17.7% YoY in Yuan terms) signaling significant domestic weakness (and thus a larger drag on global growth). Policymakers are already stressing a weaker Yuan will boost exports, and despite recent Yuan strength, it appears the currency wars are far from over.

PBOC strengthens Yuan by most since Nov 2014

The message from China was heard loud and clear from the IMF meetings in Lima: The United States [Fed] "should assume its global responsibilities" given the dollar's status as reserve currency; "now is not the time to raise rates."

"I heard time and again this week from governors of emerging-market central banks that it’s not the hike itself that worries them. It’s how much and when it occurs." "Delaying an increase in rates only increases volatility and uncertainty in emerging markets."

Major Chinese telecom supplier Fu Chang Electronic Technology Co. (also known as Fosunny), shocked its 3,800 employees when  instead of going public, the company announced it would be going dark instead when it issued a statement saying it was ceasing operations due to liquidity problems resulting from legal and debt issues.

"It's really beginning to 'feel' close. The first major event could happen anytime now." The coming storm promises to be the largest of our lifetime. We shall all be affected by it. A few will profit from it. Some will be mildly negatively impacted; most will be hit hard, due to being unprepared.