DMR–Gold tumbles in Asia, Europe; stages minor recovery in U.S.

DAILY MARKET REPORT

Gold took a bit of a tumble in Asian and European markets overnight trading at one point just below $1208 before staging a minor recovery. It is now trading at the $1211.50 level in U.S. markets – down $2.00 on the day – as China’s yuan and Japan’s yen stubbornly track lower.  Currency traders, at this juncture, seem poised to test China’s support of the yuan signaled late last week.  Silver is down 5¢ this morning at $15.33.  The markets in general seem to be off to a tenuous start for the week with stocks on the downside and bond yields steady ahead of a heavy issue of Treasuries through mid-week and inflation numbers on Thursday and Friday.

Quote of the Day
“Meanwhile, China instability and trade fears see EM markets take another leg lower, with particular market concern for the highly levered Asian economies. De-risking/de-leveraging dynamics attain self-reinforcing momentum, as contagion effects engulf the global ‘periphery.’ Fears of global financial fragility and economic vulnerability see risk aversion begin to gravitate toward the ‘core.’ Fears of EM central bank and Chinese selling of U.S. Treasuries overwhelm safe haven buying, as de-risking/de-leveraging dynamics see a widening of Credit spreads and illiquidity begin to impact ‘core’ fixed-income markets. In such a problematic global scenario, I ponder whether Beijing might perceive it’s playing with a relatively stronger hand than their U.S. adversary. Meanwhile, contagion effects would set their sights on the ‘periphery of the core.’ This just doesn’t seem all that far-fetched.” – Doug Noland, Credit Bubble Bulletin

Chart of the Day

Chart courtesy of TradingEconomics.com

Chart note: If you follow the on-going trade war between the United States and China with even passing interest, you have no doubt come across references to China selling U.S. Treasuries as its ultimate hole card.  This chart shows something that few, including many financial journalists, acknowledge:  China has been unloading exchange reserves since 2014 when they peaked at nearly $4 trillion.  Most of those reductions, which have taken China’s reserves to a little over $3 trillion (a 25% reduction) came as part of its policy to smooth the yuan exchange rate against the dollar and prevent wholesale capital flight. It is unclear at this juncture to what extent China would be willing to drain reserves in defense of the yuan in the future. Trading Economics, as the chart shows, projects further reserve reductions in the future.

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