Hong Kong

It was all about China once again, where following a report of a historic layoff in which China's second biggest coal producer Longmay Group fired an unprecedented 100,000 or 40% of its workforce, overnight we got the latest industrial profits figure which plunging -8.8% Y/Y was the biggest drop since at least 2011, and which the National Bureau of Statistics attributed to "exchange rate losses, weak stock markets, falling industrial goods prices as well as a bigger rise in costs than increases in revenue." In not so many words: a "hard-landing."

The Western gold space has learned a great deal about the Chinese gold market and global gold flows, though we’re always left with loose ends. For example, the issue regarding PBOC gold purchases; how much gold do they truly have and where was it bought? Does the PBOC buy 400-ounce Good Delivery (GD) bars in London and covertly transports these gold bars to its gold vaults in China mainland, or are the Good Delivery gold bars shipped to Switzerland, refined into 1 Kg 9999 gold bars, sent forward to the Chinese mainland where they’re required to be sold through the SGE gold exchange and from where they can be bought (in clear sight) by the PBOC.

"...there’s an enormous and growing disconnect between the cash and physical markets for gold. This is exactly what we would expect to precede a major market-shaking event based on a physical gold shortage."

Are some Chinese banks ramping up their exposure to shadow conduits on the way to obscuring massive amounts of credit risk? Moody's says yes...

As documented here and elsewhere, in addition to the Pope and Putin, the third world leader US president Obama is "historically" meeting this week is China's President, and General Secretary of the Chinese Communist party, Xi Jinping. But just like everywhere else, the president is mostly a figurehead for far greater political and primarily financial interests backing him. So who calls the shots in China? The following infographc lays out the key power divisions of political, economic and financial power in China at this moment.

• Global Markets Rebound on Yellen Speech (WSJ)
• Obama and Putin to meet; Syria and Ukraine vie for attention (Reuters)
• Obama to host China's President Xi amid simmering tensions (Reuters)
• Don't Fall for It, Xi! Chinese Take to Web to Scorn U.S.—and China, Too (BBG)
• Yellen Confirms Fed Still on Track to Raise Rates This Year (BBG)... but is still China dependent?
• Abe's New Economic Plan Confounds Analysts (BBG)
• It's All `Perverted' Now as U.S. Swap Spreads Tumble Below Zero (BBG)

The evening started on a high note when Janet Yellen's survival giving a speech warranted a 100 point rip in Dow futures (and USD strength). Then Japan stepped up with its first deflationary CPI print since April 2013 (which of course was met with stock-buying because moar QQE is overdue but that soon faded). EM FX is tumbling further (with Malaysia leading the charge). Chinese credit risk jumps tro a new 2 year high (as SHIBOR remains entirely manipulated flat) as China halts its 4-day devaluation with a tiny nudge stronger in the Yuan fix.

As powerful as the Fed is, it isn’t stronger than the markets. And the longer the Fed tries to sustain abnormalities like QE and 0% interest rates, the more likely it is that the whole business will end with the markets crushing the Fed. At the next sign of a market swoon or of a weakening economy, or with the next episode of deflationary jitters, the Fed will do whatever it takes, no matter what the eventual damage to the dollar’s value. Whatever the details, one thing should be clear. This politburo of unaccountable central planners is the greatest risk to your financial wellbeing today.

• Global Stocks Steady Despite China Slowdown (WSJ)
• European Recovery Saves Markets From China Gloom as Stocks Rally (BBG)
• Pope starts U.S. trip with tone of conciliation (Reuters)
• FBI Said to Recover Personal E-Mails From Hillary Clinton Server (BBG)
• Volkswagen chief faces grilling by board over diesel scandal (Reuters)
• 'European Detroit' Fear Grips VW Company Town as Scandal Widens (BBG)
• Berlin finds itself caught up in Volkswagen scandal (FT)

In many ways, the overnight market has so far been a reversal of yesterday, when a stable Asia session (with China stocks rising) gave way to a European tumble which in turn dragged the US lower.

AsiaPac stocks are opening mixed after the US session gains. Perhaps the biggest news of the evening is, as China's bankiong regulator has been meeting with foreign banks to express concerns over lack of risk control around non-performing loans. As CBRC said, rather stunningly honest for a government entity, "the current situation is more severe than the time in 2008 during the financial crisis." With stocks up while commodities (Zinc) limit-down, PBOC injects another CNY50 bn and devalued the Yuan fix for the 2nd day in a row.

News That Matters

• Fed is out so...BOJ brainstorms stimulus overhaul as options dwindle (Reuters)
• And... Yellen Pause Ups Pressure on Draghi as Global Pessimism Mounts (BBG)
• But... Eurozone Nears Limits of What Monetary Policy Can Do (WSJ)
• Global shares struggle on global growth concerns (Reuters)
• VW's Emissions Cheating Found by Curious Clean-Air Group (BBG)
• David Cameron allegedly fucked a dead pig's head (Mirror)

While the U.S. has never had a truly free economy, the new study makes it evident that Americans have far less economic freedom and opportunity than they did in the year 2000. Now that economic conditions are even worse in the U.S. than they were before, a culture of extreme economic control has taken over and exacerbated the growing recession - one that history may end up redesignating a depression.

Whether Janet Yellen admits it or not, you can bet that going into today’s most important Fed meeting ever (until the next one) the supposedly “data dependent” FOMC has taken a good hard look at what’s happening in China in the wake of Beijing’s not-so-smooth transition to a new currency regime. A fresh look at the data suggests outflows from July through mid-Septemeber total more than $300 billion.