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01Sep2015 Pre-Market Commentary: Markets Expected To Gap Down Sharply Along With Oil On New Global Financial Worries From China And Japan

Written by Gary

U.S. stock futures indexes are down sharply this morning and are set to open lower as uncertain economic data from China and Japan continued to worry investors. Oil prices have pulled back fractionally as investors cover short positions and take profits following an 8% rise in the previous session.

SPY was down 2.5% (and falling) as U.S. markets are expected gap down at the opening.

Here is the current market situation from CNN Money

European markets are sharply lower today with shares in Germany off the most. The DAX is down 2.76% while London's FTSE 100 is off 2.50% and France's CAC 40 is lower by 2.32%.

It's another stormy day for stocks across the world after twin surveys showed China's manufacturing sector in the grip of its worst slump in several years. China's official Purchasing Managers' Index fell to 49.7 in August from the previous month's reading of 50.0 - the weakest showing in three years, while the Caixin China manufacturing PMI showed a final reading of 47.3 in August, the lowest since March 2009. The figures detail an even sharper slowdown in the world's second-largest economy, reinforcing fears that have triggered heavy global market selloffs.

What Is Moving the Markets

Here are the headlines moving the markets.

July 2015 CoreLogic Home Prices Year-over-Year Growth Rate Now 6.9%. Home Price Growth Continues to Accelerate

Econintersect: CoreLogic's Home Price Index (HPI) shows that home prices in the USA are up 6.9% year-over-year year-over-year (reported up 1.7% month-over-month). There is considerable backward revision in this index which makes monthly reporting problematic. CoreLogic HPI is used in the Federal Reserves's Flow of Funds to calculate the values of residential real estate.

Gloomy China factory data, Japanese investment figures pull stocks, oil lower

TOKYO (AP) — Global stock markets fell sharply Tuesday and Wall Street was set to open lower as gloomy economic data from China and Japan augured further uncertainty for investors after a brutal August.

KEEPING SCORE: Britain's FTSE 100 dropped 2.2 percent to 6,110.61 and Germany's DAX sagged 2.5 percent to 10,003.60. France's CAC 40 lost 2 percent to 4,558.76. U.S. markets also looked set to start on a weak footing, with Dow futures down 1.9 percent and S&P futures 2 percent lower.

CHINA MANUFACTURING: An official index of Chinese manufacturing fell to a three-year low last month in another sign of slower-than expected growth in the world's No. 2 economy. The manufacturing index based on a survey of factory purchasing managers fell to 49.7 points in August from 50.0 in July, indicating a contraction.

Fiat Chrysler August U.S. sales rise 2 percent, top estimates

DETROIT (Reuters) - Fiat Chrysler Automobiles NV on Tuesday led off major automakers reporting U.S. August sales, posting a stronger-than-expected rise of 2 percent, boosted by SUV and pickup truck sales.

Weak Chinese Data Rattle Markets

Global stock markets tumbled after weak manufacturing data in China fueled investors' worries about the world's second-largest economy.

Biggest Crash In South Korea Exports Since 2009 Confirms Global Trade In Freefall

While the market's attention overnight was focused on China's crumbling manufacturing and service PMI, data which was already hinted in the flash PMI reports earlier in August, the real stunner came not from China but from South Korea, which last night reported an unprecedented 14.7% collapse in exports, far worse than the -5.9% consensus estimate, and more than 4 times worse than July's 3.4%.

The number is critical because not only do exports account for about half of South Korea's GDP (with Samusng alone anecdotally accountable for 20% of the country's GDP), but because it also happens to be the first major exporting country to report monthly trade data. That makes it the perfect barometer of global trade flows, or as the case may be, the canary in the global trade coalmine. It also confirms what we reported just one week ago when we said that "Global Trade Is In Freefall".

The carnage in Korean trade is unmistakable in the following Barclays chart:

Putting South Korea plunging trade in context, this was the worst m ...

China Takes "10 Steps Back," Slaps 20% Reserve Requirement On Currency Forwards

Overnight, China decided to take steps to reduce "macro financial risks."

And by that they mean "do something quick to help ease pressure on the yuan" and by extension, on the PBoC's rapidly depleting FX reserves.

To that end, starting October 15 banks will have to hold the equivalent of 20% of clients' FX forward positions with the PBoC, where the money will sit, frozen, for a year, at 0% interest.

Obviously, that will drive up the cost of taking speculative positions which the PBoC hopes will help narrow the gap between onshore and offshore yuan and bring down volatility, although the degree to which this will help fill the CNY-CNH spread looks like an open question.

"It's a move to ease the reduction in foreign-exchange reserves," Tommy Ong, managing director for treasury and markets at DBS Bank Hong Kong, tells Bloomberg. "It will also remove lots of speculative trades that aim at short-term gains as the reserves have a minimum lock-up period of one year," adds Stan Chart's Becky Liu.

Here's a bit of color from FX strategy desks via Bloomberg:

Andy Ji, Singapore-based currency strategist at CBA:

This is typical FX control, as it limits the FX forward positions

PBOC has intervened before in the forward market, but imposing the 20% limit on outstanding forward position will require less intervention effort

Spread on CNY and CNH may not substantially narrow on this move alone, as global demand on dollar remains high and China economic grow remains slow

A Distributed Version Of Repugnance As A Constraint On Markets

from the Liberty Street Economics

-- this post authored by Rod Garratt

The 2012 Nobel Prize in economics was awarded to Alvin E. Roth and Lloyd S. Shapley for their work on matching problems. Two-sided matching problems, like assigning jobs to workers or dorm rooms to students, can be complicated enough. But sometimes the matching problem can be even more difficult. It may be that an item supplied by Alice is useful to Bob, but Bob has nothing of value to give to Alice. If, however, the item supplied by Bob is valuable to Charlie, then there is the potential for a matching chain. Charlie gives something to Alice, Alice gives something to Bob, and Bob gives something to Charlie. Such chains can by themselves be very complicated, and work must be done to identify chains that provide the most benefit. The first Nobel laureate mentioned above has done considerable work designing matching mechanisms used in kidney exchange. But why is all of this necessary? Why isn't there simply a market with prices?

Frontrunning: September 1

Charting the Market: New Month, Same China (BBG)

China jitters send stocks tumbling (Reuters)

Oil falls on weak China factory data (Reuters)

Euro zone factory growth eases in August despite modest price rises (Reuters)

Euro-Area Joblessness Falls to Lowest Level Since Early 2012 (BBG)

Clinton friend advised on U.S. politics, foreign policy (Reuters)

Korea exports slump as Asia's woes deepen (Reuters)

Greenlight Capital Down 14% for Year; David Einhorn Surveys Investors (NYT)

U.S. weighs sanctioning Russia as well as China in cyber attacks (Reuters)

China's Economic Woes Echo Across Asia

Man Group shares fall after report China head helping police probe

LONDON/BEIJING (Reuters) - Shares in British hedge fund manager Man Group Plc fell more than 6 percent in early trade on Tuesday following a report the head of its China unit had been taken into custody as part of a probe into the country's recent market volatility.

Gold Up 3.5% In August, Stocks Fall 6% to 12%


Today's Gold Prices: USD 1141.90, EUR 1012.23 and GBP 744.10 per ounce.
Yesterday's Gold Prices: Bank Holiday in UK
Friday's Gold Prices: USD 1,125.50, EUR 998.23 and GBP 730.99 per ounce.

Gold was marginally higher yesterday and closed at $1135.50 per ounce, up $1.10. Silver was 0.3% higher and closed at $14.64 per ounce.

Gold rose 3.5% in August as stocks globally saw sharp falls on growing concerns about the Chinese and the global economy. Silver was 1% lower for the month of August and also acted as a hedge from falling stock markets globally.

Asset Performance - August

Asset Performance in August @

Internationally, stocks had their worst month in the last three years. In one of the most volatile trading periods since the financial crisis, August saw $5.7 trillion erased from the value of stocks worldwide and no major stock market was left unscathed.

The S&P 500 was down a significant 6.3% and the Dow Jones Industrial Average ended the month 6.6% lower, while the Nasdaq was down 6.9%. At one stage losses were much higher but a sharp bounce toward the end of the month meant the declines were that as bad as they looked like they would be.

China jitters send global stocks tumbling

LONDON (Reuters) - World stocks and commodity prices tumbled on Tuesday, as poor Chinese data saw fears about its economic health intensify.

China, euro zone weaken despite world awash with cash

LONDON/BEIJING (Reuters) - China's giant manufacturing industry contracted while British and euro zone growth eased in August, rattling markets and reinforcing expectations interest rates may fall again or stay near zero for longer.

Oil falls on weak China factory data

LONDON (Reuters) - Oil prices fell sharply on Tuesday after official data showed China's giant manufacturing sector, one of the main engines powering the world's biggest energy consumer, contracted at its fastest pace in three years.

US Futures Tumble After Latest Abysmal Chinese Economic Data, Crude Surge Stalls

Just like the last time when Chinese flash PMI data came out at the lowest level since the financial crisis, so overnight when both the official Chinese manufacturing and service PMI data, as well as the Caixin final PMI,s confirmed China's economy has not only ground to a halt but is now contracting with the official manufacturing data the lowest in 3 years and the first contraction in 6 months, stocks around the globe tumbled on concerns another major devaluation round by the PBOC is just around the corner (especially following the unexpected strenghtening in the CNY in the past week which has cost China even more billions in reserve outflows) with the drop led by the Shanghai Composite which plunged as much as 4% before, the cavalry arrived and bought every piece of SSE 50 index of China's biggest companies it could find, and in a rerun of yestterday sent it to a green close, with the SHCOMP closing just -1.23% in the red. So much for the "no interventions" myth. We wonder which journalist will take the blame for today's rout.

Despite the latest attempt by Chinese authorities to smooth the drop, Asian equity markets traded lower as the rout in global stocks continued which saw US stocks post its worst month since May 2012 (S&P 500 -0.8%). Nikkei 225 (-3.8%) traded in negative territory in the wake of weak CAPEX (5.6% vs. Exp. 8.8%) figures, while ASX 200 (-2.1 %) is dragged lower by weakness in large banks. JGBs traded higher following the stellar 10yr JGB auction where b/c was at its highest in a year. RBA kept official cash rate unchanged at 2.00% as expected.

In Europe, stocks traded lower since the open in Europe (Euro ...

Law firm targets Google foes for private damages claims

BRUSSELS (Reuters) - U.S. law firm and class action specialist Hausfeld launched a platform on Tuesday to help pursue claims against Google, posing a potential headache for the world's No. 1 Internet search engine amid its regulatory troubles in Europe.

Calpers, Calstrs oppose joint CEO-chairman role at Bank of America

(Reuters) - Two of America's biggest public pension funds have come together to oppose an amendment of bylaws at Bank of America Corp that would allow Brian Moynihan to continue as both chief executive and chairman of the No. 2 U.S. bank by assets.

Pondering Hitler's Legacy


-- this post authored by George Friedman

Happenstance has brought me today to a house on the Austria-Germany border, just south of Salzburg. That puts me about 3 miles from the German town of Berchtesgaden, on the German side of the border. Adolf Hitler's home, the Berghof, was just outside the town, on a mountain in the Bavarian Alps. To the extent that Hitler had a home, this was it, and it was the place where Hitler met with many notables, particularly before the war began.

Huge Purchases By Chinese Oil Trader Raise Prices, Confusion

Traders involved in the Dubai spot market question Chinaoil's motives, saying its market dominance is distorting prices.

IMF's Lagarde sees weaker than expected global economic growth

JAKARTA (Reuters) - Global economic growth is likely to be weaker than earlier expected, the head of the International Monetary Fund said on Tuesday, due to a slower recovery in advanced economies and a further slowdown in emerging nations.

Spain is best example that Europe is doing things right: Schaeuble

BERLIN (Reuters) - German Finance Minister Wolfgang Schaeuble said on Tuesday that Spain's economic development showed that the euro zone was tackling its crisis well.

Weak China August factory, services point to further economic slowdown

BEIJING/SHANGHAI (Reuters) - Activity in China's factory sector shrank at its fastest rate in at least three years in August as domestic and export orders tumbled, increasing investors' fears that the world's second-largest economy may be lurching toward a hard landing.

Euro zone factory growth eases in August despite modest price rises - PMI

LONDON, (Reuters) - Euro zone manufacturing growth eased last month, despite factories barely raising prices, adding to the European Central Bank's woes as it battles to spur expansion and inflation, a survey showed.

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