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(commentary will be posted less regularly over the next two weeks as business takes me to Europe)
 
1. China’s reserves fell by almost $94 bln in August. This was a little more than the Bloomberg consensus but not as large as the $200 bln some had suggested. Valuation considerations, which are often ignored in discussions of Chinese reserves, did not appear to be a key factor in the August decline. The euro and yen rose about 2% against the US dollar in August, which would have flattered reserves which are reported in dollars. This would have been mitigated to some extent by the decline of sterling (-1.8% and the Australian dollar -2.7%).
2. The Shanghai Composite fell 2.5% as China’s market re-opened after last week’s holiday. It was the fourth consecutive losing session. The decline in the large cap stocks fueled speculation that government efforts to support the market has come to an end. Smaller cap shares advanced; encouraged perhaps by the PBOC telling the G20 that the stock market drop was nearly over.
3. The PBOC set the central reference rate for the dollar at CNY6.3589. It had closed at CNY6.3559 when the Shanghai markets closed on September 2. The dollar firmed in Shanghai and closed at CNY6.3651. The dollar appreciated to CNY6.4734 offshore (CNH), which is the highest since August 27. Many see the gap between onshore (CNY) and offshore (CNH) yuan as an indication of more downside pressure onshore yuan.
4. Some of the capital leaving China is being repatriated to Hong Kong, and this keeps the Hong Kong dollar pinned at the upper end of its band. The Hong Kong Monetary Authority continues to intervene. On Monday, it injected about HKD3.1 bln in to the banking system and accumulated dollars. The HKMA reported that reserve fell to $334.4 bln in August from $339.9 bln in July. Valuation adjustments likely offset what may have been a small build in reserves via intervention
5. The Swiss National Bank also reported reserve figures. SNB said its reserves rose to CHF540.4 bln at the end of August from CHF531.2 bln at the end of July. Valuation likely accounts for the lion’s share of the reserve increase as the euro, which as of the end of June accounted for a little more than 40% of the SNB’s reserves, rose 2% against the franc in August. With deflation pressures in Switzerland growing, attention turns to the central bank meeting on September 17.
6. Germany industrial production rose 0.7% in July. The consensus was for a 1.1% gain. However, some of the disappointment was offset by the upward revision in June from a 1.4% decline to a 0.9% fall. Nevertheless, the year-over-year pace was essentially halved to 0.5% from a revision 0.9% pace in June.
7. The fact that the Chinese stocks did not fall as much as had been feared, and the MSCI Asia-Pacific Index lost less than 0.6%, may have helped prevent the gap lower opening in the DAX that we had feared ahead of the weekend. An inside session was recorded. The near-term outlook appears to depend on exogenous factors. A break of the 10,050-10,200 range may point the direction of the next move.
8. Sterling snapped its nine-day losing streak. It pushed through the pre-weekend highs to near $1.5300. Assuming the $1.5165 area marks the low for the move, corrective gains in the coming days could lift sterling a bit above $1.5400. The BOE meeting and minutes cannot be expected to signal a policy change any time soon. We still think that a late Q2 16 hike is the most likely scenario.
9. Greece goes to the polls on September 20. The recent surveys of public opinion show a dead heat between the center-right New Democracy and Syriza. Even with the 50 bonus seats award to the party with the most votes, another coalition government looks unavoidable at this juncture The head of the New Democracy Meimarakis has indicated willingness to invite Syriza into a coalition government should it win. The Athens Stock Exchange has rallied 16.7% since the August 24 low. Technical indicators suggest further corrective gains are likely. The yield on the 10-year bond has fallen from 14% in April to about 8.80% recently. Until the implementation of the third assistance program can be evaluated, which holds the key to debt relief, IMF participation, and perhaps greater support from the ECB, a break below the 8.0% level, which was seen before the elections that produced the Syriza government, seems unlikely.
10. Oil prices slid following news that Russia will not work with OPEC to cut output. Brent and WTI was off by around 4%. There had been hope in some quarters that OPEC and some non-OPEC countries could coordinate efforts to support oil prices. There is a band of support basis the October light sweet oil contract in the $43.20-50 area. A break of this suggest the upside correction is over. The first downside target would be near $42.20.

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