From Marc to Market:
Overview: Yesterday's retreat in US indices was part of and helped further this bout of profit-taking. The MSCI Asia Pacific Index ended an eight-day advance yesterday and fell further today. Japanese indices, which had set multiyear highs, fell for the first time in nine sessions. Hong Kong led the regional slide with a 2.3% decline as China's crackdown on the gaming industry continued. Some companies in this space were reportedly to enforce the limits on minors, remove "obscene and violent content" and other unhealthy tendencies, including the "worship of money" and "effeminacy." The Dow Jones Stoxx 600 is off for the third consecutive session, which would be the longest downdraft in a couple of months. US futures are also trading heavily. The US 10-year yield peaked on Tuesday slightly above 1.38%, and today is around 1.33%. European yields are also softer, with the UK's two basis point rise being an exception. The dollar is heavy, falling against all the major currencies, with sterling, the Swiss franc and Japanese yen leading the way. Emerging market currencies, especially most of the freely accessible ones, are trading with a higher bias. The JP Morgan Emerging Markets Currency Index is firmer for the first time in four sessions. Gold is consolidating inside yesterday's range, meeting resistance in front of $1800. October WTI remains in the range seen last Thursday (~$67.85-$70.60) and has been mostly confined to a $69.00-$69.50 range today. China's iron ore contract snapped a six-day decline yesterday and rose about 0.55%. Today it gave it back and more, shedding 2.1% to make a marginal new low. On the other hand, copper and other base metals are trading higher today.
Asia Pacific
China's August CPI was softer than expected, while the PPI was higher than anticipated. China's CPI stands 0.8% above year-ago levels. It has been held in check by falling food prices, which declined 4.1% year-over-year after a 3.7% decline in July. Pork is the obvious culprit. Prices fell by 44.9% from a year ago (-43.5% in July). Non-food prices eased to 1.9% from 2.1%, the first decline since January. Core CPI (excluding food and energy) rose 1.2%, slightly slower than the 1.3% in July. Producer prices are a different story. They are 9.5% above year-ago levels, up from 9.0% in July. The drivers remain the same. Metals and materials rose. The gap between producer and consumer price increases is seen by many observers as "pent-up" inflation. Still, we are less convinced and recognize it as a phenomenon not unique to China. For most goods, the pipeline inflation hypothesis does not appear to hold.
Investing in China has become increasingly controversial. George Soros as penned essays in the leading financial press warning about investing in China. At the recent panel discussion at the US-China Economic and Security Review Commission, it was suggested that American investors are unaware of the risk. But this does not seem to be a fair assessment. Several US regulatory agencies have underscored the political risks and lack of transparency. Still, Blackrock has launched new funds for Chinese investors and its Investor Institute has advocated a higher allocation to Chinese stocks. Bridgewater's Dalio argues that China is too big to ignore, and the crackdown is not necessarily "anti-capitalist." If the "fear of missing out" can explain chasing valuations to historically rich levels, it seems a more robust explanation for investment in Chinese shares....
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