In this report, we focus on three August data releases: (1) Chinese Central Bank Activity: (2) Private Credit Growth and (3) Net Financial Flows. All three are disappointing monthly numbers. Together they are inputs to our China Liquidity index, which remains depressed and indicative of continuing economic weakness.

This report argues that August 2015 is China’s Lehman moment. Extrapolating forward, expect a Chinese ‘QE’ solution – dubbed here CE – a further 5-10% weakening in the RMB this year; spreading Asian inflation and Western deflation, and wild swings in the US Treasury market. If the PBoC fails, global bonds will rally, but if it succeeds, bonds could sell-off, much as they did in America’s QE periods.

Is it time to buy EM? Two indicators we watch closely are: (1) investors’ risk appetite and (2) cross-border flows. Great buying opportunities are often signalled when investors in general are downbeat – measured by a low exposure to risk assets (e.g. equities) and a high proportion of safe assets (e.g. cash) in portfolios – and when foreign money is flooding out. With the screens currently blazing red, is this a time to buy?

Emerging Market liquidity took a major step down last month largely because of signs of renewed weakness in China. EM Liquidity (41.4) is rising, but at a reduced pace across the EM universe and it is only keeping pace with similarly rising measures of Investors’ Risk Appetite, suggesting few investment opportunities.

The red and amber lights on our risk dashboard (pp10-11) are starting blink warnings. Two major risks are building for markets over coming months: (1) well-flagged prospect of US monetary tightening. Latest liquidity data show the Fed likely preparing for a September interest rate rise. The sliding US economy, evident in latest data, will mitigate rather than stop this move. (2) A sharp fall in Chinese Liquidity data in July 2015. Together, these trends pushed our GLI™ (Global Liquidity Index) down to a low 44.8 reading for end-July 2015 (‘normal’ range 0-100), reversing its recent rebound.

“China has no need for forex devaluation because we expect exports to pick-up in the second half of this year…”PBoC Spokesman, August 12th 2015

Global Liquidity suffered a significant setback in July 2015 with our GLI™(Global Liquidity Index) falling to 44.8 (‘normal’ range 0-100) from an unusual revised-down index value of 47.3 for June. Liquidity conditions have again become sub-par. The unquestioned winner is the US dollar, whose strength will add another deflationary twist to markets.

Emerging Market Liquidity remains subpar at an index of 41.4 (‘normal’ range 0-100) in July 2015, according to our GLI™(Global Liquidity Index). There are many positives in the latest data, but these pale when compared to weak Chinese data and the more obvious flat-lining in Chinese Central Bank liquidity.

Latest data show further slowdown in both the broader Chinese financial sector (according to Shadow Bank lending) and in the real economy (judging from the Citibank economic surprise indexes), but negative pressures appear to be lessening. Our China component of the GLI™(Global Liquidity Index) is already picking up and, if past trends are still a guide, this suggests that China’s real economy will stabilise over coming months.

Short answer is ‘No’. Capital flows still favour the US dollar, and they do not yet look kindly on gold. That time may come, but we would first have to see much looser Central Bank monetary policies, at a time when the US is talking up its policy tightness, and/ or much weaker private sector cash flows, which would signal recession. For now, the US looks underpinned, and with the exceptions of the Euro, the New Zealand dollar and most Emerging Market Currencies, paper money still looks a better place to be than gold, its antithesis.