Chinese authorities hiked the exchange reference rate of USDCNY to 6.9019 yuan on Tuesday.  From the perspective of traders this became the guidance to short yuan further, which they actually did. This also stirred more concerns about the growing weakness of the Chinese economy.

Asian stocks fell to a 17-year low on Tuesday as the slowdown of the stock market in China spreads to neighbouring regions. PBOC’s move to softer credit policy has become even more worrying after the state newspaper confirmed concerns by releasing an article about why government should push stimulus pedal to shore up economic expansion.

Growth forecasts for the IMF added gloom to the market mood which suggested that the global trade tensions do not bode well for growth and economic activity in the United States, Europe and China may soon slow down.

Traders pushed yuan to 6.9320 against the dollar on Tuesday, taking advantage of the fact that China is ready to cede ground in the foreign exchange market. The devaluation can have a positive effect on exporters though, so ShCOMP edged higher on this assumption, but this was a rather cautious move. The nature of the bullish rushes in Chinese stock market, against the backdrop of capital outflows from the Chinese economy, should be attributed to technical corrections rather than growth attempts. This Monday, China’s largest stock index collapsed by 4.3% (“mini-black Monday”), which was the most severe reaction of investors in the past two years.

Asian indices as a whole are also experiencing a decline, the broad MSCI Asian index continued to fall, closing Monday at a minimum of 15 months.

It is highly likely that Trump’s threats to punish China for currency manipulation will start to appear soon, given that one of US Treasury official expressed concern about how rapidly the yuan is losing ground. There are also rumors that this week, the head of the US Treasury Department, Mnuchin may meet with his Chinese colleagues which may help contain the wave of sales.

Obviously, the main threat to growth comes from the outflow of capital from the bond market, as it increases the cost of borrowing, which may weigh on capital expenditures. The whole process unfolded with a new force after Fed Chairman, Powell, took a very aggressive verbal position last week, unexpectedly saying that investors were lagging behind the Fed’s rate hike forecasts. The yield on US T-bills on Tuesday reached 3.24, a maximum of seven years.

The VIX volatility index jumped by almost 6% on Tuesday to a level of 15.7. The volatility sellers are finally taking a break, as this creates the right moment in the form of uncertainty in the Chinese economy.

The scope and speed of the bearish impulse in the bond market may mean a shift in the “collective assumption” of the market about the outlook of US economy and the implications of Fed policy. To do this, just look at the change of futures for the Fed rate, which reflects the change in expectations from 2 to 2.5 rate hikes in the next year.

Euro remains fragile frustrated by the separatist penchants of the Italian government also another emerging risk is the slowing growth which can be spread from China to the Europe. There is a risk that the pair will go below 1.14 by the end of the week, since October 15 will be the deadline for Italy to submit a budget plan to the European Commission. Despite the contradictory statements, the market has no clear signals about a possible compromise.

Gold got completely knocked out on Tuesday, dropping to 1182, but was quickly bought off.  China troubles and the risk of rising yields in the United States make the yellow metal even less appealing for long. The target for gold is to re-test levels below, in particular the August lows at 1160 per troy ounce.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

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