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Fear is back

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Remember a small “Black Monday”, the worst day for equities so far this year? The very same reasons are back on the table and while reactions are not yet this sharp, it’s certainly not the perfect environment for the Fed to hike for the first time in 9 years.

Yes it’s China that is back on the risk table. It took place in August just 3 weeks ahead of September FOMC meeting and ultimately had the FOMC waiting with the hike and it taking place again, just few days ahead of the FOMC (Wednesday) that’s seen as a “must hike” this time around.

The Chinese risk has actually never disappeared but some easing from the PBOC calmed down the markets and actually even the Fed saw the Chinese risk as manageable now. However, weak trade data highlighted the issue again and a continuing weakness in the CNY merely amplified rumours of the inevitable devaluation.

Just like in August we have seen a sharp sell-off on the AUDJPY (nearly 2% today) and to a smaller extent on the NZDJPY with European safe haven currencies doing well as well. Equities were struggling where higher risk plus incoming hike in the US is hitting junk bonds hard, sending a warning signal for the S&P500.

The US dollar is struggling as well today – the Chinese risk is not enough to prevent the Fed from hiking but may well have an impact on the message. Despite a decent retail sales report, EURUSD keeps flirting with 1.10 as the USD market rates have declined considerably.

Oil is down to fresh 7y lows despite the data on rigs which should be positive. China, however, is enough to keep all industrial commodities at bay.

Next week is obviously mostly about the Fed but many more things will be interesting including: Draghi (Monday, a speech), RBA minutes, UK&US inflation (Tuesday), flash PMIs, US output and GDP in NZ (Wednesday), retail sales in UK (Thursday) and BoJ (Friday).

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