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Daily Agenda: Volumes Collapse in Chinese Markets

Beijing intervention appears to have chased traders and investors away; Australia gets a new PM; Brazil unveils budget cuts.

After months of volatile trading, the dust appears to be finally settling for Chinese financial assets with more investors of all types leaving the markets there. The Shanghai Composite Index declined by 3.5 percent Tuesday following a down day Monday with significantly lower-than-average trading volume. Asset Management Association of China data released Monday revealed that total assets in equity funds in mainland China declined by over 40 percent between the end of July and the end of August as investors fled from stocks, despite government efforts to curb selling. Meanwhile, the China Financial Futures exchange, once among the busiest on earth for equity-linked products, has seen a defection of brokers after a nearly 98 percent decline in daily volume.

U.K. inflation at zero. Consumer inflation data released today by the National Statistics Office registered in line with consensus forecasts for August with the headline index flat versus the same month last year. Core inflation, which excludes volatile energy and food components, rose by 1 percent year-over-year, a sequential decline from July’s level.

German confidence weakens. Investor confidence in Germany was shaken by the slowdown in emerging markets in September, according to data released Tuesday by the ZEW Center for European Economic Research. The headline economic sentiment index dropped from 25 in August to 12.1, significantly below consensus forecasts, while an aggregate reading for the euro zone also declined sharply.

Brazil introduces new austerity measures. On Monday Brazilian finance Minister Joaquim Levy unveiled a series of spending cuts that will reduce federal government expenditures by nearly $7 billion in an attempt, combined with increased tax revenues, to close the budget gap. The move comes one week after the nation’s sovereign debt rating was cut to junk levels by Standard & Poor’s.

BOJ stays the course for now. The Bank of Japan made no changes to its easing program during the monthly rate announcement on Tuesday. In public statements, the central bank Governor Haruhiko Kuroda reiterated that the BoJ will act if the current recovery cycle shows signs of further weakness.

Australian leadership shuffle. Malcolm Turnbull was sworn in Tuesday as the fourth Prime Minster of Australia in two years after Tony Abbot’s Liberal-National coalition was ousted in a vote by Liberal members of Parliament. Meanwhile, the Australian dollar reversed a multi-day rise against the U.S. dollar after Bank of Australia minutes released from the last meeting revealed the central bank’s concern over market volatility spurred by China fears.

Portfolio Perspective: Why a Fed Decision to Wait Could be Counterproductive

A decision to leave rates unchanged this week will only intensify overall market discussion on when the rate increase will actually occur. A debate over whether the Fed will raise rates at the October or December meeting will begin almost immediately. The cloud of uncertainty will only increase as many investors are probably waiting for a rate increase before committing to any major new investments.

And with year-end approaching so fast, if the Fed does not hike this week, new investment commitments are unlikely until next year. But if the Fed does raise rates Thursday, new investment activities could resume relatively soon. We do not expect a rate hike to have a big bearish impact on most asset classes. Contrary to what many analysts claim, we believe a rate increase, whenever it occurs, is largely discounted in prices already.

Karl Haeling is a vice-president of capital markets at Landesbank Baden-Württemberg’s New York office.

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