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Decline in Chinese equity markets

Despite a decline in Chinese equity markets on their first day back after a short break, European markets managed to hold up fairly well yesterday, though they did close well off their highest levels of the day, with US markets off for their annual Labour day holiday. US markets are also set to return today where we could well get a counter reaction to last Friday’s post payroll declines. Part of this fairly positive reaction may have been down to the fact that according to the People’s Bank of China, recent interventions saw China’s currency reserves shrink by $93.9bn in August, their biggest fall ever, but still much less than expected, as it looks to smooth out currency fluctuations caused by its recent decision to shift the trading band on the yuan. This decision to weaken the yuan was undoubtedly prompted by the weakness seen in the July trade data which showed exports to Europe and Japan both showed sharp declines in excess of 12%. Given that since May last year the Yuan still remains up 15% against the euro as well as the Japanese yen even after Augusts currency adjustment, maybe this weakness in trade shouldn’t really have come as too much of a surprise. What it also means is that further yuan weakness in the coming months is much more likely, which could raise G20 tensions further in the coming months, despite the weekend’s cosy consensus, something that today’s August trade numbers looks likely to reinforce. In July imports declined 8.1% and exports declined 8.3%, and this morning’s August numbers weren’t expected to show much of an improvement and in that regard didn’t disappoint. August imports were expected to decline but a decline of 14.3% was way more than expected, and while exports did improve they still showed a decline of 6.1%. These disappointing numbers will do nothing to assuage concerns about the weakness of the Chinese economy, even allowing for the potential disruptions caused by the Tianjin warehouse blast. These weak numbers are certain to increase concerns about a continued disinflationary threat to global trade, something the Federal Reserve will have to be mindful of next week. Despite these numbers European markets are expected to open slightly higher this morning. In the UK the latest August BRC retail sales data had been expected to be disappointing due to the rather damp August weather, especially after the strong July number of 1.2% and sure enough despite expectations of a rise of 0.9%, we saw a decline of 1%, as the raft of disappointing Q3 data continued. EURUSD – currently finding support down near the 50 and 100 day MA’s at 1.1080, the risk of a move toward 1.0820 increases in a move below last week’s low. While above the 1.1080 level the risk remains for a return towards the 1.1400 level if it regains a foothold above the 200 day MA at 1.1280. GBPUSD – nine successive daily declines saw the pound drop back to the June lows at 1.5170 last week, where it has found a level of support. Yesterday’s rebound saw a bullish reversal which suggests a return to the 1.5340 level, and then on up to 1.5430. A move below 1.5170 argues for a test of the May lows at 1.5080. EURGBP – while below the 200 day MA despite a Friday rebound the risk remains for a move back towards the 0.7230 level while below 0.7380. Only above 0.7400 argues for a move towards the May highs at 0.7485. USDJPY – having peaked at 121.75 last week and back below the 200 day MA at 120.75 the US dollar looks vulnerable to a return to the 116.20 area seen a couple of weeks ago.



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