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Monday, August 24, 2015 - 08:39

MNI Spotlight: Stock Mkts Rout Continues; Dlr Down, Tsys Up

--Dow Industrials Poised for Ugly Open in US
--European Offls See Recovery Surviving Mkts Lurch

WASHINGTON (MNI) - The following are top events and news reported Monday morning ET by MNI in the global financial system:

* The global stock market rout, which has slammed European equity markets harder than those in the U.S., is still unlikely to derail the fledgling Eurozone recovery, government officials and analysts said. Equity market declines in Europe Monday, following the latest plunge in Chinese stocks, knocked the FTSEEuroFirst 300 index of top European shares down 3.9%, bringing its loss for August to more than 12%, its worst month since October 2008. The August plunge, which has erased more than E1 trillion in market value, compares with losses through Friday of less than 7% for both the Dow Jones Industrial Average and the S&P 500. Monday's S&P 500 is seen opening around 3% lower Monday morning. Dow futures have been volatile, at times seeing a percentage point worse opening but generally in line with the S&P. The Nasdaq futures were halted at the down limit. Officials say Europe's recovery, based on rock-bottom interest rates, cheap and still declining oil prices and a weak euro, remains well grounded despite the swings in global equity prices. "We expect this volatility coming from China to pass," one French government official told MNI. "The fundamentals behind the European recovery remain sound." Meanwhile the dollar is down and oil prices have fallen further, with NYMEX WTI off $1.60 at $38.85 and Brent down $1.68 at $43.64 at 8:30 ET. U.S. Treasuries were higher, with the 10-year around 1.964%, as prices soared to new highs into the N.Y. open. [8:30 ET]

* China share prices collapsed after expectations of a weekend required deposit reserve rate cut failed to materialize. The benchmark Shanghai Composite Index led declines in Asia, ending down 8.49% at 3209.91, having fallen as low as 9% in the afternoon. Hong Kong's Hang Seng Index dropped 4.91% to 21,310.77. Shanghai is now below the level recorded at the end of 2014, signalling the failure of the extraordinary intervention measures taken by Beijing in June and July to try to support the index. 3:02 ET]

* Chinese stock analysts said Monday's calamitous fall confirms the failure of the government's interventions to prop up share prices. It's long past time for the People's Bank of China to step in and provide a policy boost, they said. Monday's 8.5% plunge in the Shanghai Composite Index to 3,205 was in part a reflection of disappointment that the central bank didn't cut the required deposit reserve ratio at the weekend. The bank had been expected to institute another 50 basis point cut to address concerns about capital outflows, which have built up since the August 11 yuan devaluation announcement. An official with a bank based in southern China said after the close Monday that the PBOC has delayed too long and that 50 basis points will no longer do the trick. He said the central bank will need to cut by 100 basis points, releasing an estimated CNY1.2 trillion into the system, because the government needs to hold the line for the stock market at 3,000 points if it wants to avoid systemic problems related to the popular investment vehicles marketed as wealth management products. "Banks have so many wealth management products invested in the stock market. If the market falls too much, what'll happen to them?" he said. [4:36 ET]

* Japanese officials say there is little they can do but monitor current market turmoil as any monetary policy response is limited at this point because market gyrations appear to be beyond fundamentals and not triggered by domestic factors. A prolonged slide in share prices would reduce the wealth effect, which has supported retail sales, while a return to one-sided appreciation of the yen would trim exporter profits, undermining Prime Minister Shinzo Abe's reflationary economic policy. Against these downside risks, all Japanese officials can say is they are "monitoring the developments in the markets carefully." Puzzling for them is a plunge in stock markets in the past few days triggered by fears of a further slowdown in growth in China and other emerging economies while fundamentals around the world seem unchanged drastically from the recent outlook by the IMF and other organizations that a modest recovery is ahead. "The Chinese slowdown has been somewhat anticipated and partly intentional by the authorities that are shifting the economy toward more consumption from export-led growth," said a person who is familiar with BOJ thinking. "The U.S. and European economic fundamentals remain firm." [Repeated 7:12 ET]

* Three-quarters of U.S. business economists surveyed see liftoff happening this year and a little more than a third expect the Fed's first rate hike in more than nine years to happen in September. The new survey was taken before the stock market began to plummet. Seventy-seven percent of respondents to the August 2015 Economic Policy Survey by the National Association for Business Economics expect the the FOMC to raise its target for the federal funds rate above the current 0-to-25 basis-point range before the end of this year. That's up six percentage points from the 71% of panelists who held this view in the March 2015 Policy Survey. "A large and growing majority of business economists expects the Federal Open Market Committee to raise its target for the federal funds rate before the end of 2015," NABE President John Silvia, chief economist at Wells Fargo, said in a statement. "A slightly smaller majority believes that the FOMC should raise interest rates before year end." More than one-third look for such a move as soon as September of 2015, and 17% expect the Fed to keep policy on hold until 2016 or later, a notably smaller share than the 25% who held this view in March. [Repeated 7:16 ET]

* China's economic planning agency defended the country's prospects Monday, arguing that growth will be stable in the second half, that fundamentals remain sound and that the government has plenty of policy room on the policy front to respond. The National Development and Reform Commission's assessment was dated Monday but made no reference to the 9% plunge in the stock market. Instead, the commission argued that China's economic fundamentals haven't changed and that the government is on track for major economic indicators to meet their targets. The NDRC did acknowledge the risks facing the Chinese economy, but indicated that these are external in nature, including the chance of a Federal Reserve interest rate hike, falling commodities prices and other geopolitical factors. Domestically, cuts to production capacity, destocking and deleveraging will also weigh, the NDRC admitted. There was no detail in the comments, which were presented as a broad overview of economic conditions, hinting that the government is prepared to take more action to try to turn around the stock market or institute fresh policy easing. [5:15 ET]

* Chinese legislators are meeting this week to review the fixing of a ceiling on outstanding local government debt, the official Xinhua News Agency reported. Minister of Finance Lou Jiwei told National People's Congress delegates in Beijing on Monday that the imposition of a ceiling on local government debt is an important part of managing local government borrowing. Lou said the Finance Ministry, together with the central bank and other government agencies, have gone through and verified local government debt numbers as at the end of 2014. He said the proposed debt ceiling for local governments covers outstanding local government debt at the end of 2014 plus new local government debt for this year as approved in March by the NPC. [5:33 ET]

* The PBOC's large-scale injections via its open market operations last week, as well as the Medium-term Lending Facility funds, were in response to increasing capital outflows, said the Financial News, a PBOC-owned newspaper in a commentary. The newspaper said the PBOC is trying to adjust short-, medium- and long-term liquidity and reduce volatility in money rates. It said the central bank will use more open market operations, together with other tools, to create base money. The Financial News commentary made no mention of any cut to the bank deposit reserve ratio. [3:02 ET]

* Prime Minister Shinzo Abe is not holding the Bank of Japan responsible for failing to anchor 2% inflation anytime soon in a joint effort with the government to reflate the economy while BOJ officials are counting on tight labor supply to raise consumer prices. Abe told parliament Monday that it is "inevitable" that the BOJ cannot hit the 2% inflation target as planned at a time when global energy prices are falling, which filters through to many items in the CPI basket of goods and services. "I understand the Bank of Japan's explanation that it has become difficult to achieve the 2% price target when crude oil prices are falling," he told the Upper House Budget Committee. Abe didn't say whether he thinks the BOJ is unlikely to meet its latest, delayed timeframe that 2% inflation will be achieved "around" the first half of fiscal 2016 (April-September). But he also said while weak oil prices have a big impact on the consumer price index, lower energy costs should support an economic recovery. [1:06 ET]

--MNI Washington Bureau; tel: +1 202-371-2121; email:

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