Overview: The markets are having a rough adjustment to the return of the Chinese markets are the week-long holiday. The cut in the required reserves failed to lift investor sentiment. The Shanghai and Shenzhen Composites fell almost 4%, and the yuan slid nearly 0.8%. It is an unusually large decline for the closely managed currency. The offshore yuan fell by a little more than 0.5%. There are appears to have been a jump in offshore sales of mainland shares through the stock connect facilities. Japanese markets are closed for a national holiday, which spared, for the time being, the erosion of equities throughout the region. European shares are losing ground for a third session.  Italy’s bond continues last week’s slide, induced by the confrontation with the EU over the 2019 budget. Core bond yields are lower. The dollar is firmer against nearly all major and emerging market currencies, though the risk-off mood has seen the yen and Swiss franc resist the greenback’s pull. Emerging market equities are broadly lower, and South Africa, China, Russia, and Turkey currencies are the weakest.  

Given the slide in equities and the dollar’s strength last week, the return of China was set to be dramatic. The cut in required reserves and the better than expected Caixin non-manufacturing PMI (53.1 vs. 51.5in August and expectations for 51.4) and composite (52.1 vs. 52.0 in August) were unable to stem the tide. The dollar rose above CNY6.92, and there is speculation that the line in the sand at CNY7.0 is not as significant as it was previously. Economic conditions have deteriorated, and monetary policy has been relaxed.  

Separately, and amid another volley of media reports claiming the demise of the dollar, China may be preparing to bring dollar-bonds to the market. Indications are for around $3 bln of 5-, 10-, and 30-year maturities. It would be the second dollar offering this year. Despite a lower credit rating, China pays a small 15-20 bp premium on top of Treasuries.