Sept 7/Special post on Chinese trading Sunday night/Monday morning plus European trading

Good evening Ladies and Gentlemen:
Just a short commentary highlighting some physical stories and to give some details as to trading overnight in Asia and Europe:
Important gold/silver physical stories of importance over the weekend:
The totals for August are now in and a huge 301 tonnes of gold withdrawals have been recorded for the month.  The week ending August 28 saw 60 tonnes and so far for the year to date: 1718 tonnes.
(courtesy Lawrence Williams/GATA)

Lawrie Williams: Shanghai gold deliveries for August were phenomenal


By Lawrie Williams, London
Sunday, September 6, 2015

August is always a weak month for physical gold moving through China’s Shanghai Gold Exchange — or rather it has been up until now. The big months for SGE withdrawals are normally at the beginning and the end of the year ahead of the Chinese New Year holidays, while trading in the summer months is usually thin.

But not this year. Gold moving through the exchange this August has totaled a phenomenal 301.96 tonnes, bringing the year-to-date total to 1,718.2 tonnes, some 219 tonnes more at the same time of year than in 2013, when China consumed a record amount of gold even according to the consistently much lower consumption estimates by the major precious metals analytical consultancies. …

… For the remainder of the report:…



Record Gold exports to the UK and then this gold heads to China

(courtesy Koos Jansen)

Posted on 4 Sep 2015 by

Record Monthly Gold Export UK to China

The UK net exported a record 32.4 tonnes of gold directly to China mainland in June 2015.

In 2014 the conventional conduits of bullion flows to China, from all around the world first to Hong Kong and then to the mainland, have been replaced by direct exports. For example, the UK is exporting bullion directly to China since April 2014 – as I reported at the time. The result of the rearrangement in these gold flows is that Hong Kong’s export to the mainland has lost its accuracy as an indicator for China’s gold hunger. In a few posts we’ll have a look at trade data from several gold exporting nations and trading hubs to grasp how much gold China is importing this year.

Starting April last year, UK shipments of gold directly to China have been going up. In June 2015 the UK net exported a record 32.4 tonnes of gold to China, up 6.5 % m/m, up 116 % y/y.

UK - China Gold Trade 2012 - June 2015
Exhibit 1.

Let’s see if we can learn some more from the UK’s trade data. Remarkably, the UK became a net importer of gold in June with 2 tonnes net imported. Falling total gold exports and rising total gold imports caused this. Concluding, although China imported a record monthly tonnage from the UK in June, the Brits did not suffer a net outflow because of concurrent strong imports into London. UK total gold import in June was 49.3 tonnes, compared to a gold net export to China at 32.4 tonnes. Have a look at the below chart for some clarity.

UK Gold Trade 2012 - June 2015
Exhibit 2.

In the above chart, we can see the UK’s total net export has been going down in the past few months (black line), although we know that net export to China has increased (exhibit 1). Who was exporting gold to the UK to be sent forward to China? In June it was the US at 19.5 tonnes, which was the highest amount since February 2012, and Canada at 18.4 tonnes.

Chinese gold wholesale demand measured by SGE withdrawals was high in June at 196 tonnes (exhibit 2). We shall see what the supply composition (mine/import/scrap) was of SGE withdrawals when gold export data from more countries is released.

Koos Jansen
E-mail Koos Jansen on:



Jim Rickards on China’s strategy with respect to gold and the USA dollar

(courtesy Da Silva interview of Jim Rickards)

Jim Rickards on China’s strategy toward the dollar and gold


11:35p ET Friday, September 4, 2015

Dear Friend of GATA and Gold:

Interviewed by Tekoa Da Silva of Sprott Global Resource Investments, fund manager and author James G. Rickards outlines what he sees as China’s strategy toward the U.S. dollar and gold. Rickards adds that confidence in a currency is easily lost. The interview is posted at the Sprott Global Internet site here:…

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.



The following is a huge story.  Ronan Manly notes that originally the LBMA reported that gold refining in 2013 amounted to 6601 tonnes. Somehow that number shifted and the new report was only 4600 tones for the year.  I guess that the LBMA were not excited to show that 6600 tonnes of  gold was being refined as that would strongly indicate the true amounts of gold entering China i.e. both sovereign purchases and citizen gold purchases:

(courtesy Ronan Manly/GATA/Bullionstar)

Ronan Manly: LBMA’s shifting stance on gold refinery production statistics


10:17a ET Monday, September 7, 2015

Dear Friend of GATA and Gold:

Gold researcher and GATA consultant Ronan Manly reports that the London Bullion Market Association substantially reduced its refinery production statistics after he reported that they showed that far more gold was being refined than was being mined or returned to refineries as scrap. The implication seems to be that the LBMA sought to conceal the huge volume of Western central bank gold being converted to smaller and purer bars and shipped to Asia. Manly’s report is headlined “Moving the Goalposts: The LBMA’s Shifting Stance on Gold Refinery Production Statistics” and it’s posted at Bullion Star here:…

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.




We are addressing the following in the body of our commentary:

(courtesy Chan/London telegraph)

China’s foreign exchange war chest drained as growth fears intensify


By Szu Ping Chan
The Telegraph, London
Monday, September 7, 2015

China’s war chest of foreign exchange reserves fell by the largest amount on record in August, as official data revealed the cost of efforts to defend the renminbi.

Reserves fell by $93.9 billion to $3.56 trillion (L2.33 trillion) last month, according to the People’s Bank of China (PBoC).

The amount represents the biggest monthly fall on record and the largest in percentage terms since May 2012, when the country’s reserves fell by almost 3 percent.

China’s central bank has sold dollars to support its currency following the PBoC’s shock decision to devalue the yuan for the first time in modern history. …

… For the remainder of the report:…



And now your overnight early Monday morning trading in bourses, currencies, and interest rates from Europe and Asia:

1 Chinese yuan vs USA dollar/yuan rises again, this  time to   6.3608/Shanghai bourse: red and Hang Sang: red

Surprisingly, last week, officially, China added another 19 tonnes of gold to its official reserves now totaling 1677.

2 Nikkei up 68.31   or 0.38.%

3. Europe stocks all in the green     /USA dollar index up to  96.29/Euro up to 1.1140

3b Japan 10 year bond yield: falls to 0.37% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 119.44

3c Nikkei now below 18,000

3d USA/Yen rate now well below the important 120 barrier this morning

3e WTI:  45.47 and Brent:  48.96

3f Gold down  /Yen down

3gJapan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.

Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.

3h Oil down for WTI and down for Brent this morning

3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund falls  to .662 per cent. German bunds in negative yields from 4 years out

 Greece  sees its 2 year rate falls to 10.69%/Greek stocks this morning up by 0.95%:  still expect continual bank runs on Greek banks /

3j Greek 10 year bond yield rises to  : 9.32%

3k Gold at $1121.00 /silver $14.54  (8 am est)

3l USA vs Russian rouble; (Russian rouble down 21/100 in  roubles/dollar) 68.24,

3m oil into the 45 dollar handle for WTI and 48 handle for Brent/Saudi Arabia increases production to drive out competition.

3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation  (already upon us). This can spell financial disaster for the rest of the world/China forced to do QE!! as it lowers its yuan value to the dollar.

30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning .9755 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0874 well above the floor set by the Swiss Finance Minister. Thomas Jordan, chief of the Swiss National Bank continues to purchase euros trying to lower value of the Swiss Franc.

3p Britain’s serious fraud squad investigating the Bank of England/

3r the 4 year German bund now enters in negative territory with the 10 year moving closer to negativity to +.664%

3s The ELA lowers to  89.1 billion euros, a reduction of .6 billion euros for Greece.  The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Greece votes again and agrees to more austerity even though 79% of the populace are against.

4. USA 10 year treasury bond at 2.12% early this morning. Thirty year rate below 3% at 2.88% / yield curve flatten/foreshadowing recession.

5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.

(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)


And now trading from China (and Europe) overnight:


Chinese Stocks Surge Then Tumble At The Close, Stun Market News Algos; Futures Levitate On Back Of USDJPY

Chinese stocks opened with a bang, and as we previously noted soared higher at the open after China’s long 4-day holiday weekend, which however subsequently slowly (but very surely) fizzled, eating away at the hope that the 3-day drop in the Shanghai Composite would finally come to an end following comments from PBOC governor Zhou that the recent rout in Chinese stocks is almost over, and result in a relief rally in Europe and the US. Alas, all that was promptly swept away at the end of trading in China when the Shanghai Composite tumbled at close of trading to confirm just how unpleasant a “death cross” is coupled with loss of central bank control, and to push the Shanghai Composite down 2.5% for the day and 3.4% for the year.


To be sure, there was enough volatility to confuse the AP’s market reporting algos as can be seen on the screengrab below.


For once we commiserate with the algos: following last night’s action, which once again definitively showed that if nothing else China clearly has no idea how to manipulate market and used up all its dry powder in the first minutes of trading, we are quite concerned what will happen tonight when this time US stocks will open shortly after China’s latest horror show.

That said, the biggest news out of Asia had nothing to do with its market, and everything to do with the PBOC’s confirmation China saw a record $94 billion in reserve outflow in August (precisely in line with our post from 2 weeks ago, the one that started it all: “Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks“). We will have much more to say on this shortly in a follow up post.

Elsewhere in Asia, equities traded mixed (clearly – see confused algos above) following the initial gain in Chinese equities however, the index saw selling pressure heading into the close (Shanghai Comp. -2.5%). Nikkei 225 (+0.32%) fluctuated between gains and losses with price action driven by a weaker JPY, while ASX 200 (-0.2%) was the session’s laggard dragged lower by weakness in energy and basic materials, after Friday’s declines in commodities. JGBs traded relatively flat amid the volatility seen in Asian stocks, while the BoJ also entered the market to purchase JPY 1.2trl of government bonds.

Stocks in Europe traded higher since the open (EuroStoxx +0.3%), benefiting from supportive comments made by the governor of the PBOC who said that the recent rout in Chinese financial markets is almost over. At the same time, the sentiment was buoyed by the announcement from the commodities trading giant Glencore (+6.6%), which finally succumbed to market pressure and announced plans to address its financial position amid the slump in commodities market. As a result, energy and material names outperformed on the sector breakdown, that’s in spite of the ongoing weakness in energy prices, with WTI and Brent crude trading lower this morning.

In the US, the E-mini which is trading was up 0.6% at last check, continuing to be driven entirely and only by the smallest gyration in the USDJPY, as markets try to milk every last bit of Yen carry trading before the market starts pricing in the tapering (and end) of the BOJ’s QE which as even the IMF warned has about 2 more years to go.

Elsewhere, despite the better bid stocks, Bunds traded only marginally lower, while peripheral bond yield spreads traded mixed , with lOy SP/GE, PO/GE and FR/GE spreads trading slightly wider, while IT/GE outperformed and traded tighter on the session.

In FX, GBP outperformed its major counterpart EUR, supported by expectation that the recent turmoil in China and slower growth in the UK will not derail plans by the MPC to raise rates. At the same time, USD/JPY has come off its recent lows amid an improved sentiment and also growing expectation that the BoJ may announce additional easing, with analysts at BNP highlighting consequent weakness in 2y swaps. On that note, according to sources, BoJ officials do not have full confidence in the underlying growth of the economy.

Elsewhere, despite AUD trading higher, benefiting from better bid copper prices, 1-month vol rose to 14% level, for the first time since February, highlighting the depressed outlook for the currency.

Finally, in commodities despite the relatively subdued price action by gold and silver, copper prices rose and outperformed its peers in reaction to Glencore’s announcement regarding its financial position which also included the company stating that it is to suspend copper production at two top mines in Africa, in turn removing 400,000 tonnes from market, in turn supporting copper prices.

At the same time, WTI and Brent crude futures traded lower, given the lack of agreement by OPEC and non-OPEC states to support prices. Elsewhere, it was reported citing Libya East NOC’s Chairman stating that the political accord may help oil ports to re-open.

With the US closed to labor day, we expect that the European close will be quiet as even the algos are still in the Hamptons.

Market Wrap

  • S&P futs +0.6% to 1934
  • DJIA futs +0.5% to 16197
  • NDX futs  +0.6% to 4219
  • DAX +0.7 to 10106
  • Nikkei +0.4% to 17860
  • WTI – 1.2% to  $45.49
  • Brent – 1.1% to $49.20
  • Gold -0.1% to $1,122
  • EURUSD -0.1% 1.1145
  • USDJPY +0.3% 119.39

Bulletin Headline Summary from RanSquawk

  • Stocks in Europe traded higher since the open, benefiting from supportive comments made by the
    governor of the PBOC who said that the recent rout in Chinese financial markets is almost over
  • The sentiment was buoyed by the announcement from the commodities trading giant Glencore (+5.77%), which finally succumbed to market pressure and announced plans to address its financial position amid the slump in commodities market
  • Going forward, there is little in terms of tier 1 data releases, with US markets closed for Labor Day holiday

DB’s Jim Reid concludes the overnight and weekend recap:

A quick glance at China as it’s re-opened for the first time since last Wednesday. It’s been an all too familiar choppy start with the Shanghai Comp currently going into the midday break in positive territory (+0.88%) although paring a near 2% gain at the open and doing its best to swing between gains and losses. There’s been a similar move too for the CSI 300 (+0.31%) although it’s been a much stronger start for the Shenzhen, up +3.08% as we type. Elsewhere it’s fairly mixed across the rest of Asia this morning. The Nikkei (+0.44%) has rebounded off a weak start along with the Hang Seng (+0.22%) while the Kospi (+0.02%) is unchanged and the ASX (-0.57%) currently down. China’s statistics bureau has revised down its 2014 growth reading to 7.3% from 7.4%, bringing it in line with original forecasts from analysts while indicating that the number could be revised one more time when the final results are due in January. Meanwhile, we’re also awaiting the first significant data print of the week with China’s August foreign reserves data due sometime this morning where market consensus currently is for a $70bn decline. This will be particularly important in light of the recent ‘QT’ argument. Elsewhere in markets this morning it’s been a slightly soft start in the Oil complex, currently trading half a percent lower while credit markets have been relatively well behaved, little changed as we type.

Onto the weekend’s headlines now where the main attention has been on the G20 meeting and comments out of the PBoC in particular. Voicing confidence in China’s equity markets, PBoC Governor Zhou said that the correction in Chinese equity markets ‘is almost done’ and that the Central Bank’s actions in providing liquidity through various channels prevented the market from ‘falling off a cliff’, while adding that ‘there has been no notable effect on the real economy’. On the subject of the currency, Zhou emphasized that presently the exchange rate versus the Dollar is ‘stabilizing’ and that the recent devaluation was aimed at bringing the Yuan more in line with its peers and giving market forces bigger sway in deciding its value. The soothing words were seemingly echoed in a joint communiqué from the G20 finance ministers, stating that ‘we will refrain from competitive devaluations and will resist all forms of protectionism’. Easier said than done in reality.

Whether or not markets echo similar confidence in Chinese equity remains to be seen, but in the mean time focus turns to the September FOMC decision in just 10 days and which comes following an August employment report on Friday which only helped further muddy the waters. August payrolls rose 173k last month, well below market expectations of 217k (although in line with our US team’s forecast) but with a cumulative 44k of upward revisions. The weaker headline was also in contrast to the other associated employment indicators. The unemployment rate declined two-tenths to 5.1% (vs. 5.2% expected), average hourly earnings ticked up 0.3% mom during the month (vs. +0.2% expected) and the average workweek rose one-tenth to 34.6 hours (vs. 34.5 hours expected). That well balanced mix of weakness and strength ultimately saw no change to September liftoff expectations, priced at 30% this morning which is where we were Friday morning prior to the release. As our colleagues across the pond note, the key issue for the Fed now is whether or not they will go against the markets’ expectation of no change in policy, with the behaviour of financial markets over the next 10 days likely to play a big part in that decision.

We’ll have to wait until tomorrow to see any further reaction in the US with markets closed for Labour Day today, although there was a decent leg lower for US equities post the report on Friday with the S&P 500 eventually closing down 1.53%, while the Dow (-1.66%) and Nasdaq (-1.05%) also saw similar falls. Despite already having a soft day, European equities also declined in tandem with the Stoxx 600 eventually closing the session down 2.52%. Oil markets weakened although in fairness the bulk of the move lower came towards the end of the day. Brent finished the week back under $50 at $49.61/bbl (-2.11% on Friday) and in the process marked the 11th negative weekly return in the last 12th weeks. Gold pared a brief spark higher to finish down 0.32% which was representative of an all round weaker day across the commodity complex.

Much of the reaction in Treasuries was at the short end of the curve where 2y yields in particular climbed, although fairly modestly, to finish the day 1.4bps higher at 0.709%. 10y Treasury yields were more or less unchanged relative to where they were in the moments before the report at 2.124%, 3.5bps lower on the day. Closer to home and with just a weaker than expected German factory orders print (-1.4% mom vs. -0.6% expected) in the European timezone to digest, 10y Bunds finished the session nearly 6bps lower at 0.665%.

Turning over to this week’s calendar now. With Labour Day in the US today the only data releases due are in Europe where we get German industrial production and Euro area investor confidence. All eyes tomorrow morning will be on China where we get the August trade data readings, which some have said last month contributed to China devaluing. In Japan we get the final Q2 GDP reading along with the latest trade balance. There’s more trade data in Europe too on Tuesday with German and French readings due, while the preliminary Q2 GDP print for the Euro area will be closely watched. With the US open again, it’s the usual post payrolls lull with just the NFIB small business optimism survey and consumer credit readings expected. It’s quieter in Asia on Wednesday with just Japan consumer confidence expected. That’s before we get the UK trade balance reading in Europe along with industrial and manufacturing production, while over in the US the JOLTS job openings print is the sole release. We kick Thursday off in China again with more top tier releases in CPI and PPI, while machine orders and PPI are also due in Japan. French industrial and manufacturing production highlight the data out of Europe before we get the BoE decision around midday. Dataflow picks up in the US on Thursday with wholesale inventories and trade sales, import price index and initial jobless claims all scheduled. Closing out the week on Friday in Europe we’ve got German CPI along with UK construction output data. In the US meanwhile, we end the week with PPI and University of Michigan consumer sentiment prints, along with the Monthly Budget Statement. With the FOMC meeting around the corner, there’s a lack of Fedspeak now with just non-voter Kocherlakota due to speak on Tuesday.


Sunday night: 9:30 pm/9:30 am Shanghai Monday morning


China stocks hit the infamous Death cross whereby the 50 day moving average crosses over the 200 day moving average.  This is considered the death knell for stocks.  Also credit default swaps rise indicating the huge risk to the Chinese economy, stocks and bonds. Most troubling was the doubling of overnight rates. Also Toshiba announces his huge loss which sends the yen tumbling, enabling more of the USA/JPY ramp in stocks which benefited Europe this morning.

(courtesy zero hedge)

China Stocks “Death Cross”, Default Risk Hits 2-Year High As Regulators Promise G-20 ‘Whatever It Takes’ To Stabilize Market

Even before China reopened from its 5-day holiday,regulators were pitching Chinese stocks as cheap(37.3x P/E) and less-margined (+108% YoY) andpromised to “safeguard stability” in a “variety of forms” seemingly pouting cold water on The FT’s recent report (and the malicious instigator of China’s market crash). All of this is quite ironic, given China’s chief central bankers admitted “the chinese bubble has burst.” As stocks open, CSI-300 (China’s S&P 500) has confirmed a ‘Death Cross’ which in 2008 was followed by a further 60% decline. More troubling, however, is the incessant rise in interbank rates asdespite CNY530bn of liquidity injected in the last 3 weeks, overnight rates have doubled. China credit risk jumps to 2-year highs and AsiaPac stocks are generally lower at the open (as US futures dumped’n’pumped) not helped by Japanese weakness on BoJ tapering concerns. PBOC strengthened the Yuan fix for the 4th day in a row – the most since Sept 2010.

After 3 days of stronger Yuan fixes into Wednesday of last week (before China closed), PBOC went even further – fixing Yuan 0.21% stronger, extending the streak to 4 days and 0.73% stroger – the biggest 4-day move in 5 years…


China’s “S&P 500” just suffered a Death Cross (50-day moving average crossing below the 200-day moving-average)…

It did not end well on previous occasions and we note that Shanghai Composite is likely to suffer this technical signal within the next week also.

AsiaPac stocks are weaker…


Dow Futures algorithmically extinguished all the stops above Friday’s highs and below Friday’s lows before tumbling back to unch…

*  *  *

However, even before tonight’s weakness began…

Speaking via the government’s unofficial mouthpiece – Xinhua – China Securities Regulatory Commission promised…



we want to continue to stabilize the market and prevent systemic risk as a primary task to stabilize the market – to repair market…

when violent abnormal fluctuations in the market which may lead to systemic risks, the China Securities Finance Co., Ltd. will continue to play a role, safeguarding stability in a variety of forms.

In addition, CSRC seemingly started pitching Chinese stocks as ‘cheap’ again noting that the P/E ration has tumbled (yeah but Shenzhen sticll 37.3x forward guesstimates) and laverage has dropped (yeah margiun debt is down CNY1 trillion but it is still up 100% YoY)…


However, most troubling of all is the doubling of overnight lending rates in the Chinese interbank market… Despite CNY 530bn in liquidity injections in the last 3 weeks alone...

SHIFON has doubled!!!!

Indicating Chinese banks are under massive liquidity stress… and implicitly the government too…


China is now credit riskier than Italy, Spain, and Saudi Arabia.

*  *  *

Away from China, Japanese markets are turmoiling after BOJ Tapering concerns mount…

and not helped by Toshiba’s massive accounting fraud loss…


Sending USDJPY plunging…

Paging Mr.Kuroda…

As everyone awaits South Korea’s rate decision later this week… The carnage in Korean trade is unmistakable in the following Barclays chart:

As for what this means for Korean monetary policy, no surprise here: more easing.

We now expect the BoK to deliver a further 25bp rate cut in Q4, most likely in October. We see an outside chance of an earlier move, at the 11 September meeting, but we continue to believe that the BoK will prefer to move after the initial delivery of the fiscal supplementary spending and the US FOMC meeting on 17-18 September. Also, we now expect the first rate hike in Korea in Q3 16, rather than in late Q1 16. Moreover, with key indicators for the services economy showing a healthy post-MERS rebound, we believe the urgency to act immediately is still low. We believe the existing focus on engineering a weaker KRW bias – possibly by stockpiling essential commodities such as fuel – will remain.  

Of course, further easing by South Korea, or even an outright devaluation, means the ball will then be in the court of Korea’s trade competitors, who will then be compelled to match the Korean move with further easing (or devaluation) of their own, and so on, until one can no longer sweep the global recession under the rug. It isn’t called the global race to the bottom for nothing.

Charts: Bloomberg




Monday morning 8 am est, we finally get the true numbers of USA treasury liquidation:  94 billion USA. The real number is closer to 115 billion USA/ a staggering burn rate!!


(courtesy zero hedge)

The Numbers Are In: China Dumps A Record $94 Billion In US Treasurys In One Month

Shortly after the PBoC’s move to devalue the yuan, we noted with some alarm that it looked as though China may have drawn down its reserves by more than $100 billion in the space of just two weeks. That, we went on the point out, would represent a stunning increase over the previous pace of the country’s reserve draw down, which we’ve began documenting months ahead of the devaluation (see here, for instance). We went on to estimate, based on the estimated size of the RMB carry trade unwind, how large the FX reserve liquidation might need to be to offset capital outflows and finally, late last week, we suggested that China’s official FX reserve data was set to become the new risk-on/off trigger for nervous, erratic markets. In short, the pace at which Beijing is burning through its USD assets in defense of the yuan has serious implications not only for investors’ collective perception of market stability, but for yields on core paper, for global liquidity, and for US monetary policy. 

On Monday we got the official data from China and sure enough, we find out that the PBoC liquidated around $94 billion in reserves during the month of August and as Goldman argues (see below), the “real” figure might have been closer to $115 billion. Whatever the case, it’s a staggering burn rate and needless to say, were the PBoC to continue to liquidate its assets at this pace, it would necessitate a raft of RRR cuts and hundreds of billions in short-term liquidity ops to ensure that money market don’t seize up in the face of the liquidity drain.

Here’s some commentary from across sellside desks on the official numbers:

  • From RBC’s Sue Trinh:
    • China FX reserves suggest about $140b used to defend yuan in April once valuation is accounted for
    • Believes PBOC has been intervening to maintain the yuan’s stability since the devaluation, but this kind of intervention can’t continue indefinitely
    • It’s unsustainable in the long run; yuan is overvalued by around 15% by RBC’s latest estimate; still targeting USD/CNY at 6.56 by year-end and 6.95 by the end of 2016
  • From Commerzbank’s Zhou Hao:
    • Decline in foreign reserves clearly suggests China’s central bank intervened intensively in the FX market to stabilize CNY exchange rate
    • “One-off devaluation” in mid-Aug. triggered market expectations of further CNY deprecation, which has not only endangered the financial stability, but also posts a downside risk to the economy due to capital outflows
    • It’s costly because frequent intervention will burn foreign reserves rapidly and tighten the onshore market liquidity; that said, further tightening of regulations is expected near term
    • Expects spread between CNY and CNH is likely to persist as PBOC has become an active player in onshore market
  • From Goldman:
    • The People’s Bank of China (PBOC) reported that its foreign exchange reserves dropped by US$94bn in August, to US$3.557tn at the end of the month. However, it is not straightforward to derive the actual scale of FX reserves sales from the headline FX reserves data, given uncertain valuation effects and possible balance sheet management by the PBOC.
    • It is possible to get an approximate sense about valuation effects stemming from currency movement: e.g., assuming the currency composition of the PBOC’s FX reserves broadly follows that of the average country’s (using the IMF COFER weights, which suggest roughly 70% in USD for EM countries), the currency valuation effect would probably be positive to the tune of roughly US$20bn (i.e., if we only look at the change in headline FX reserves as a gauge of sales of FX reserves, sales of FX reserves might have been underestimated by around US$20bn, given the currency valuation effect).However, besides currency movements, there could also be significant valuation effects from changes to the market prices of the PBOC’s investment portfolios, and the direction and size of those effects is hard to measure given the uncertainty of the asset composition. Moreover, there could also be possible short-term transactions and agreements between the PBOC and banks that may complicate the interpretation of the change in FX reserves as an underlying measure of RMB demand.

Of course the huge draw down was widely anticipated and indeed, we’ve explored and detailed virtually every angle of this story in the lead up to the data. The key takeaway here is that we now have official confirmation that August saw $94 billion in reverse QE (and more likely $115 billion) or, quantitative tightening as Deutsche Bank puts it.

We can, as we explained on Saturday, argue about what the ultimate effect on safe haven assets will be, but what’s not up for debate is that conceptually speaking, China’s massive UST dumping is the opposite of Western central bank QE and as such should be expected to pressure yields. More specifically, Citi has suggested that for every $500 billion in EM FX reserve liquidation, there’s an attendant 108 bps or so of upward pressure on 10Y yields. Similarly, Deutsche Bank, citing the extant literature, flags 50-60bps of upward pressure on 5Y yields for every $100 billion in monthly EM FX reserve liquidations.

The takeaway, as we put it last week, is that if the Fed hikes this month, it will be tightening into a tightening.

But it’s not that simple. It’s also possible that, if China’s FX reserve draw downs do indeed end up serving as a trigger for risk-off behavior (i.e. a selloff in risk assets), the subsequent flight to safety could end up driving yields on long bonds lower, not higher. We discussed this in detail over the weekend.

Still, China isn’t the only country liquidating its USD assets. When you consider that global EM FX reserves amount to more than $7 trillion, it seems reasonable to ask whether the flight to safety that would invariably accompany a worldwide selloff in risk assets would be sufficient to replace the lost bid from massive reserve draw downs. Or, as we put it on Saturday, “the real question is what would everyone else do. If the other EMs join China in liquidating the combined $7.5 trillion in FX reserves (i.e., mostly US Trasurys but also those of Europe and Japan) shown below into an illiquid Treasury bond market where central banks already hold 30% or more of all 10 Year equivalents (the BOJ will own 60% by 2018), then it is debatable whether the mere outflow from stocks into bonds will offset the rate carnage.”

And that consideration, in turn, puts the Fed in a very, very difficult spot. A rate hike cycle will put further pressure on already beleaguered EM currencies which raises the possibility that the FX reserve liquidation will be larger than the eventual safe haven flows and besides, there’s bound to be a lag between the liquidation of USD assets and the flight to safety and given the potential for extraordinary bouts of volatility in UST, JGB, and German Bund markets, it’s anyone’s guess what happens in between.

Whatever the case, something will have to give here because all of these dynamics (i.e. a Fed hike, China’s massive UST dumping, an EM meltdown precipitating FX reserve drawdowns, illiquid markets for the same assets everyone is dumping, hemorrhaging petrostate budgets, etc.) simply cannot coexist for long without something snapping because, as we put it last week, in this very unstable arrangement, the smallest policy error will reverberate exponentially, and those reverberations can lead to only one thing: the Fed’s admission of policy failure by adopting a tightening bias, and ultimately launching another phase of monetary easing, be it QE4 or perhaps even the long-overdue and much anticipated Friedmanesque “helicopter money” episode.






What!!! another one!!

Another Chinese Chemical Plant Explodes, Huge Clouds Of Black Smoke Billow Skyward

If you’re planning on travelling to China, we have two pieces of advice:

  1. Do not look like a short seller
  2. Do not go near any chemical factories

Failing to heed the first tip there could get you thrown in jail (or, as Man Group’s China chief Li Yifei calls it, sent on a “short vacation”).

The consequences of failing to follow the second piece of advice above could be, how should we put this… explosive.

With Beijing still scrambling to contain the fallout (both figuratively and literally) from the devastating blast at Tianjin which killed some 160 people and injured more than 700 last month, the country is on edge. Two additional chemical blasts (both in Shandong) did little to calm China’s frayed nerves and now, a fourth blast, this time in Zhejiang, has been reported. Here’s Reuters:

An explosion shook a chemical plant in the Chinese province of Zhejiang, state media said on Monday, though there were no immediate reports of casualties in a country on edge after blasts killed more than 160 people last month.


The blast caused a fire and thick smoke to bellow from the plant in Lishui city shortly before midnight, state radio said on its official Weibo microblog.

With Tianjin it was sodium cyanide and with Shandong adiponitrile – looking at the visuals below, we can’t help but wonder what’s now being disbursed into the air over Zhejiang.

Here are the visuals:

This morning, inside Turkey:

Powder Kegs Exploding: Violence Escalates In Turkey, Yemen As Mid-East Tips Towards Chaos

On Friday we checked in on two of the world’s most important conflicts: 1) that which is unfolding in Turkey where President Recep Tayyip Erdogan has effectively granted Washington access to Incirlik (you know, for “anti-terror” sorties) in exchange for NATO’s acquiescence to a brutal crackdown on the Kurds as AKP looks to usurp Turkey’s fragile democracy, and 2) that which is unfolding in Yemen, where a Saudi-led coalition is fighting to restore the government of Abd Rabbuh Mansur Hadi. 

In Turkey, Erdogan has successfully undermined the coalition building process necessitating new elections in November when he hopes the escalation of violence across the country will prompt voters to restore AKP’s parliamentary majority allowing the President to rewrite the constitution and consolidate his power. Journalists arebeing arrested, a terror “tip line” has been set up, a 24-hour Erodgan Presidential TV channel is in the works, and the country has, for all intents and purposes, been plunged into civil war with ISIS acting as a smokescreen for Erdogan’s power grab.

As for Yemen, the Iran-backed Houthis have been driven back by Saudi and UAE troops but the problem, as WSJ noted last week, is that the ragtag militia in Aden is “a motley group that spans the spectrum from southern secessionists to ultraconservative Salafi Islamists to supporters of al Qaeda.” In other words, it doesn’t seem all that far-fetched to suggest that should restoring Hadi ultimately prove to be impossible, an independent South Yemen could end up falling into the hands of extremists, which would be ironic not only for the fact that it would represent the latest example of US foreign policy gone horribly awry, but also because according to at least one source, the Saleh government – whose fighters are now allied with the Houthis – for years worked with AQP while accepting US anti-terror funding. Notably, were Yemen to split in two, it would also effectively create a permanent Iranian colony on Saudi Arabia’s southern border.

In the two days since we detailed the latest on the two conflicts, both situations have deteriorated meaningfully. In Turkey, roadside bombs killed several Turkish soldiers on Sunday prompting a swift response from Ankara. Here’s more from Rudaw:

Several Turkish soldiers were killed or wounded Sunday by roadside bombs blamed on the Kurdistan Workers’ Party (PKK) in Turkey’s Kurdish southeast, the official Anadolu Agency reported.


It said the Turkish air force had launched air raids on PKK targets in the country’s Kurdish southeast following the attack. 


“Explosives reportedly planted by PKK terrorists on a road in the southeastern Hakkari province on Sunday have killed and wounded several soldiers,” AA reported.


It said the attack took place in the town of Daglica in Yuksekova district on Sunday evening. The bombs reportedly went off near two Turkish military vehicles carrying soldiers.


Security sources said several soldiers were killed or wounded, AA reported, adding there was no official statement on casualties.


PKK’s armed wing the Peoples Defence Force (HPG) however, said in a statement that the roadside bomb killed 15 Turkish soldiers.


“Guerrillas conducted an action against Turkish soldiers in Geliye Doske (Dagl?ca) area in Hakkari’s Gever (Yuksekova) district today afternoon, which left 15 soldiers dead,” said the HPG.


The group added that a number of weapons seized in the ambush.


Turkish President Recep Tayyip Erdogan told the private ATV channel that the war on terror would be waged “with much greater determination” since the attack.

Yes, “much greater determination”, which means more violence and more crackdowns on the media and anyone deemed to be a PKK sympathizer. Case in point, from AFP:

Supporters of Turkey’s ruling Justice and Development Party (AKP) on Sunday stormed the headquarters of the Hurriyet newspaper in Istanbul after accusing the daily of misquoting President Recep Tayyip Erdogan, the publication said. 


A group of 150 people chanting slogans supporting the AKP pelted the offices of Hurriyet in Istanbul’s Bagcilar district with rocks, knocking out windows and the front door.

It’s worth noting that a military campaign waged with “much greater determination” also means traders will continue to pressure the lira and Turkish stocks – and they too, will employ “much greater determination”:

“One thing that all market participants agree on is continued volatility in the Turkish markets on global turmoil and political and geopolitical risk in Turkey,” Gulsen Ayaz, a director of institutional equity sales at Deniz Yatirim in Istanbul, told Bloomberg by e-mail. “Yesterday’s attack by the PKK has once again heightened the latter and the markets are pricing this.”

Of course as Erdogan will be happy to tell you, this could all have been avoided if voters had simply cast their ballot for AKP in June. Again, from AFP:

“If a party had got 400 seats in the elections and reached the required number in parliament to change the constitution, the situation would be different,” he said in a live interview with pro-government A-Haber channel. 

The violence and market turmoil comes on the heels of a two-day G20 meeting in Ankara.

Meanwhile, in Yemen, the Houthis carried out the deadliest strike yet on the Saudi coalition killing 45 UAE troops when a missle hit a weapons depot in Marib province on Friday. “The sands of Marib are swallowing the invaders and their mercenaries,” a Houthi official purportedly said on Twitter.

That attack – which also killed 10 Saudis – has precipitated stepped up airstrikes and now, the deployment of more thatn 1,000 troops from Qatar. Here’s Bloomberg:

Gulf Arab nations are expanding the ground war in Yemen, pouring more troops into the country to defeat Houthi rebels they say are backed by regional rival Iran.


About 1,000 troops from Qatar entered Yemen on Sunday from the Wadia post on the border with Saudi Arabia, the Qatari-owned Al Jazeera television reported. The soldiers, backed by armored vehicles and missile launchers, were on their way to Yemen’s oil-rich central Marib province, it said. Qatar’s foreign ministry didn’t immediately respond to calls seeking comment.


The deployment comes after 45 troops from the United Arab Emirates and 10 Saudi soldiers were killed in Marib on Friday, the worst setback to date for the Saudi-led coalition since it began its offensive in March. Mounting losses will test the will of the Gulf states to extend their involvement after helping the internationally recognized government of President Abdurabuh Mansur Hadi retake parts of southern Yemen.


Expanding the ground war carries a “huge risk of heavy casualties” for the Gulf Arab monarchies, said Ibrahim Fraihat, senior foreign policy fellow at the Brookings Doha Center. “Yemen has historically proved to be a very tough spot for foreign armies to fight and win.”

Maybe so, but if the coalition doesn’t score a decisive victory over the Houthis it won’t be for lack of trying because after all, the establishment of an Iranian proto-state on Saudi Arabia’s southern border is absolutely out of the question in Riyadh’s eyes.

So as the coalition drives towards Sana’a – which the Saudi-owned al-Hayat newspaper says will be “liberated” after a “decisive battle” in Marib – and as Turkey, the US, Saudi Arabia, Jordan, and Qatar mull options for the final push to oust Assad in Syria, the only remaining question is whether Iran will remain on the sidelines and allow the Houthis to be routed and Assad deposed, or whether, like Moscow, Tehran finally decides that the time for rheotric has come to an end.

And on that note, we’ll close with the following from AP:

Iran’s foreign minister on Monday criticized demands for the resignation of Syrian President Bashar Assad, saying such calls have prolonged the Arab country’s civil war.


Mohammad Javad Zarif went so far as to say that those who have in the past years demanded Assad’s ouster “are responsible for the bloodshed in Syria.”


This morning, in Brussels, they are complaining that the farmers cannot sell their produce due to the Russian embargo!!
(courtesy zero hedge)

Meanwhile In Brussels, Farmers Take On The Riot Police With “Hay Cannon”

As events unfold that have to be seen to be be believed in Belgian capital Brussels, European farmers –protesting plunging food prices, blamed on Russia’s food embargo, which was retaliation to Europe and US sanctions – are demanding EU intervention to bail them out. What was originally a parade of tractors quickly turned violent as farm equipment rammed police barricades and police released tear gas and water jets in response to the farmers unleashing their “hay cannon.”Boomerang anyone?


It all started peacefully…



But soon turned violent…





And then the farmers unleashed the “hay cannon”… out came the tear gas…


As AFP reports,

Belgian police on Monday fired water cannon at European farmers who lobbed hay and fireworks as they demanded EU intervention against plunging food prices partly blamed on a Russian embargo.


The European Commission said it would release 500 million euros ($557 million) in emergency funds to help ease the pressure on farmers, as agriculture ministers held crisis talks on the situation.


The protest involved what organisers said was up to 6,000 farmers, who blocked streets in Brussels with hundreds of tractors, who targeted the heavily-guarded European Union headquarters where the talks took place.


Police briefly fired water cannon at protesters as farmers used a machine to shoot hay at police, AFP reporters said.Protesters also hurled eggs and set fire to planks of wood and tyres, sending thick black smoke wafting over EU buildings.


A combination of factors, including changing dietary habits, slowing Chinese demand and a Russian embargo on Western products in response to sanctions over the Ukraine conflict, has pushed down prices for beef, pork and milk.


“We are here today to demand EU action,” Albert Jan Maat, president of European farmers association Copa, told reporters outside the ministers meeting in central Brussels.

*  *  *

We leave it to the farmers coop leader to summarize…

“EU farmers are paying the price for international politics,” he said, adding the Russian embargo hit the EU’s main export market which is worth 5.5 billion euros.



“There have been hundreds of suicides as a result of disastrous agricultural policies,” said Remy Hulin, a retired farmer from the Calvados region of northern France carrying an effigy in farmer’s overalls hanging from a gallows.

*  *  *

Another unintended consequence of foreign policies that Washington and Brussels apparently did not see coming…

With a huge refugee problem, France decides to bomb Syria.  We are not making this up!!
(courtesy zero hedge)

France Prepares To Bomb Syria In Retaliation For Refugee Crisis

Filed under ‘what the f##k?’, French President Francois Hollande is preparing for air strikes in Syria in a somewhat mind-numbing approach to to stem a flood of refugees from the Middle East into Europe. Using the always-ready excuse of “grappling with the threat of terrorism,” Bloomberg reportsHollande’s response to Europe’s biggest refugee crisis since World War II by increasing the bombing of the very place from which the refugees are fleeing

As Bloomberg reports, France is preparing for air strikes in Syria as President Francois Hollande seeks ways both to stem a flood of refugees from  the Middle East into Europe and grapple with the threat of terrorism.

Hollande is seeking a response to Europe’s biggest refugee crisis since World War II in tune with public opinion that remains largely hostile to a massive increase in immigration.


“I’ve asked the minister of defense to begin reconnaissance flights over Syria from tomorrow that would allow for strikes against the Islamic State,” Hollande said at a press conference in Paris on Monday. Hollande, who ruled out sending troops, said Syrian leader Bashar al-Assad is an impediment to peace in the country.


France has warplanes in Abu Dhabi and at a Jordanian air force base.


“These will be reconnaissance and intelligence flights,” Hollande said. “We want to know where the training and command sites are.”

German Chancellor Angela Merkel announced 6 billion euros ($6.7 billion) to help the thousands of migrants pouring into the country. Hollande said today that France will accept 24,000 refugees over two years. He estimates that there are 60,000 asylum seekers in France in 2015.

Hollande also called for “massive” aid to support camps in countries neighboring Syria so that refugees can stay as close as possible to home.


“Let’s face reality,” he said. There are four million refugees in camps in countries such as Jordan and Turkey and “if we want to avoid an exodus, what we have to do is supply massive aid” so that “these people can stay as close as possible to the country from which they are fleeing.”

*  *  *

Maybe it’s our cynicism shining through once again but does this not have the smell of the “Syrian Chemical warfare YouTube clips” debacle… Flood Europe with Syrian refugees, drowned children as collateral damage, gain empathy points with the media blaming it all on Assad once again… and enabling more airstrikes, military equipment, and devastation to be unleashed.

Oil tumbles close to the 43 dollar handle!!
(courtesy zero hedge)

WTI Crude Tumbles To $44 Handle (As Algos Forget US Closed)

Despite US markets being closed for Labor Day, WTI Crude futures traders algos appear to be following the post-EU close run-the-stops pattern. Despite rising tensions in the middle-east and China promising their market is stable, WTI Crude is down almost 4%, back to a $43 handle…


Closing currency crosses for MONDAY night/USA dollar index/USA 10 yr bond:  3:00 pm
 Euro/USA: 1.1170 up .0034 (Euro up 34 basis points)
USA/Japan: 119.34 up .371 (Yen down 37 basis points)
Great Britain/USA: 1.5286 up .0120 (Pound up 120 basis points USA/Canada: 1.3306 up .0027 (Canadian dollar down 27 basis points)

USA/Chinese Yuan:  6.3549  par

This afternoon, the Euro rose by 25 basis points to trade at 1.1149. The Yen rose to 118.91 for a gain of 121 basis points as the yen carry traders were obliterated . The pound was down 69 basis points, trading at 1.5188. The Canadian dollar fell 71 basis points to 1.3260. The USA/Yuan closed at 6.3544.
Your closing 10 yr USA bond yield: up basis points from Friday at 2.14%// ( well below the resistance level of 2.27-2.32%).
USA 30 yr bond yield: 2.88 down down 1 in basis points on the day
 Your closing USA dollar index: 96.14 down 14 cents on the day .
European and Dow Jones stock index closes:
England FTSE up 31.60 points or 0.52%
Paris CAC up 26.56 points or 0.59%
German Dax up 70.57 points or 0.70%
Spain’s Ibex down 16.40 points or 0.17%
Italian FTSE-MIB up 149.66.or 0.70%
The Dow closed
Nasdaq; closed
OIL: WTI:  $44.20    and  Brent:  $47.65
Closing USA/Russian rouble cross: 69.21  down 71/100 roubles per dollar on the day
Tomorrow we will present a detailed account on what is going on in China with that massive amount of treasuries liquidated and what it means.
I will see you tomorrow




  2. Hello Harvey

    What do you think will become of Gold when the Fed start QE4?



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