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Frequent Contributor

Don't check cattle at midnight and then check markets UGGGHHHH

Well boys it's bad.  Here's some back ground


Craig Stephen's This Week in China Get email alerts
And now for China’s great foreign-capital unwind

Published: Aug 16, 2015 11:29 p.m. ET



A vendor at a market in Beijing last week.

HONG KONG (MarketWatch) — Among the many unknowns in China is just how much of its prodigious credit boom has been built on foreign capital. After last week’s high-stakes gamble to devalue the yuan, we may soon find out.

So much investment and hot money had bought into Beijing’s flagship policy of a strong yuan pegged to the U.S. dollar — which has appreciated DXY, -0.41% about 30% since 2005 — that this reversal moves into almost uncharted territory. By shattering a 10-year consensus held by everyone from deposit holders in Hong Kong to high-yield-bond investors in Europe, the unwind in capital flows could be of seismic proportions.

See: The proof that U.S. markets care more about China than about Greece

While some explain last week’s surprise yuan devaluation as little move than an overdue step toward a market-determined exchange rate, a more plausible interpretation is that the People’s Bank of China jettisoned its exchange rate policy as a last resort; a culmination of events after which the pain of attempting to hold its currency peg to the U.S. dollar finally became unbearable.

This scenario would be supported by data released last Friday for July, showing the biggest monthly surge in money outflows since 1998 as foreign-exchange funds held at Chinese banks fell by 249.1 billion yuan ($39 billion).

Meanwhile, another sign of stress is that short-term borrowing costs in the interbank markets in China and Hong Kong spiked last week, suggesting again that investors were pulling out of the yuan. The overnight Shanghai interbank offered rate (or Shibor) leapt 1,380 basis points to 1.667% over the past week, reaching a near four-month high, and the one-month Shibor jumped to 2.495%, a one-week high.

For some time Beijing has been under pressure to hold together the “impossible trinity” of a closed capital account, independent monetary policy and a tightly managed exchange rate. Capital outflows ratchet up the pain as the central bank has to buy yuan to support the peg and withdraw liquidity from the economy.

This was difficult enough when authorities have been attempting to provide sufficient liquidity to put a floor under a foundering economy. But then the stock market rout heaped further pressure on the PBOC as it was given ultimate responsibility, through a massive state-buying scheme, to also keep shares from falling.

If this wasn’t enough, the central bank had just pushed the problem of near-bankrupt municipal authorities out of its in-tray. Weeks earlier the central government had strong-armed state banks into buying 2 trillion yuan’s worth of debt swap bonds designed to refinance broke municipal authorities.

It is hardly a stretch to state that with the central government lining up to be on the hook for municipal authority debt and stock-market losses, this deteriorating picture would persuade some investors to get out of yuan.

These foreign-currency outflows also come as Beijing has suffered two significant setbacks to support international confidence in yuan assets. In June Chinese shares failed to be included in the MSCI Emerging Markets benchmark Index. Last week Beijing learned it will need to wait at least another year before the yuan can be considered for inclusion as an International Monetary Fund reserve currency.

Since 2007 and the global financial crisis, indications are that China has become much more reliant on international funds, despite still officially operating a closed capital account.

This period has coincided with not just yuan appreciation but the Federal Reserve’s quantitative-easing program, which helped direct abundant hot money to China. One of the drivers of the massive growth in China’s shadow banking was global capital seeking the higher returns on offer. And a strong and appreciating currency was crucial to attracting capital.

This stood out during the 2013 taper tantrums, as, while much of the rest of Asia was suffering currency weakness and capital outflows, China was spared. In fact, due to the conviction behind its policy-driven exchange rate, the yuan was actually seen as a safe haven.

Capital also flowed into China, as quantitative easing by Japan added to carry-trade borrowing in U.S. dollars or Hong Kong dollars into the mainland. The stability of the yuan also contributed to a boom in offshore high-yield-bond funding by Chinese corporates as investors clamored for yield.

Now with this initial yuan weakening, together with the fact that the U.S. central bank is set to raise interest rates, the conditions look set for this big carry trade into Chinese assets to unwind.

Even after last week’s small devaluation, analysts are already highlighting how much things have changed. Julius Baer commented that its call to buy offshore renminbi bonds was partly based on the low volatility in the USD/CNH cross, but this argument can no longer be maintained. In fact total returns in the last two years have been wiped out in U.S. dollar terms in just two days, based on the HSBC Off-Shore Renminbi Total Return Index.

China looks to be in for an extremely bumpy ride as a lot more investors question the risk of holding yuan assets.


Notice the dateline Prophetic?


Price of Gold


The dollar is weaker, Gold is weaker, Silver is weaker..........................................



AND OIL IS BELOW $40.00!!!!!!!!!!!!!!!


I don't care how much yield the PFT stole from your fields it ain't enough cause we are going to have to much supply for the demand. E plants are going to start going on extended shutdowns for "repairs" very soon. 


And I just read a blurp about china trying to inject more liquidity by reducing reserves banks must hold to cover deposits!!!!


Feels like 2008


I'll bet calamity Janet is up tonight watching this.


Don't beat up Marketeye over the bad news tomorrow. I beat him to the punch.


If in the morning I check this and corn and beans aren't down we will know the plunge protection team just did an awesome job of firing up the printing presses.


I would be checking safety rails and locking all windows to tall buildings in finacial districts tomorrow.



If this thing really gets rolling corn down 15 before the day is out. If not sell everything.



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13 Replies
BA Deere
Honored Advisor

Re: Don't check cattle at midnight and then check markets UGGGHHHH

Kill a lamb and paint your door posts with it`s blood, the angel of death is here.

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Honored Advisor

Re: Don't check cattle at midnight and then check markets UGGGHHHH

You cow guys should really find some outside interests. WE want the markets to be down hard at the opening. It is the only way to begin a recovery, release the panic early in the day. FED steps in around 11 or 1 and we build into the close and settle "off the session lows" by a little and a little confidence can sprout maybe.


BA, you do realize that only works if you are following the laws of Moses in your daily life right? Probably kind of hard to find many who even know what the law says these days. Smiley Sad

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Re: Don't check cattle at midnight and then check markets UGGGHHHH

This Shemitah is occurring under Obama's watch so he will not be able to blame Bush this time! Going to be ugly I am afraid.
Senior Advisor

Re: Don't check cattle at midnight and then check markets UGGGHHHH

We haven't seen ugly

Dow could sluff another 2-3K and still be heathy.

As for grains. Who knows. But if we truly need pain then we haven't seen it yet.

JR. Just an FYI. You don't wanna see pain. $2 corn and $6 beans don't work well in these tough ole MO hills. Insurance helps until you get a year where spring and harvest price are horrible and your rev guarantee isn't enough to cover inputs let alone make land or machinery.
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BA Deere
Honored Advisor

Re: Don't check cattle at midnight and then check markets UGGGHHHH

The pretty people on Good Morning America tell me that this is just a "correction and hard as it is stay the course" and go back to bed, it`s all good.  And you know in the past that has been the case, the markets, well equities anyway scare the bejeebers out of everyone one week only to come roaring back to new highs the next week seemingly inexplicable.


This time could be different, in the past China was stable, claiming "8% growth" they were some sort of lifeboat.  Perhaps this time will be like all the other close calls and the "plunge protection tem" or gremilins will swoop in like Batman and save the day.   But if the rest of the world is in flames, with a global economy if we can remain an "island" that will be a pretty neat trick.

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Senior Contributor

Re: Don't check cattle at midnight and then check markets UGGGHHHH

You still holding short puts corn /beans ??
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Honored Advisor

Re: Don't check cattle at midnight and then check markets UGGGHHHH should subscribe, or at least come to our meeting on Wednesday...cost the same.

No, we covered the short corn puts at a small profit early last week, and covered the short

bean puts down about 30 cents. We are wrong on occassion. Part of the business of managing

risk, sometimes you have to pay the premiums. Still short the wheat puts however and adding

more every couple of weeks.


Mostly short feeders and long wheat. Short a little S&P just because it was so easy to do early last week. This was the easiest flash crash to see coming in decades.


Today would be a great day to cover feed needs. How much more panic can you get? Plus, this dry weather is just about the last thing a soybean needs in late August. jmo

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Senior Contributor

Re: Don't check cattle at midnight and then check markets UGGGHHHH

Buying opp here .Grains anyway. Like to come to meeting . Just can't get away. Thanks though.
Feds will save it this time,equities.Next time will be the end.
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Honored Advisor

Re: Don't check cattle at midnight and then check markets UGGGHHHH

Agree ih...this was just the first sell signal in 8 years. The actual crash happens after recover to the breakout point. Well, that is normally what happens. No gaurantees. It is a bad TIME to be holding paper for the next couple of years. jmo

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