A limited credit tightening effect from EM

Both financial and real economy channels carry China's slowdown to the rest of the world. Friday, the release of August TIC data showed a net outflow of $9.2bn with net foreign private inflows of $37.3bn and net foreign private outflows of $46.5bn. On the breakdown, Treasury bonds and notes saw net private inflows of $6.2bn and net official outflows of $41.1bn. While this seems to confirm the idea of some selling by EM FX reserves, it also confirms the view that offsetting the official outflows are still significant private inflows. By comparison, global FX reserves declined $77bn in August, albeit that part of this is due to valuation effects. 

Keep in mind, moreover, that in any case, EM selling of Treasuries does not impact the US monetary base and the amount of dollars in circulation. It could be argued, however, that such selling could trigger credit tightening via the portfolio rebalancing effect. However further monetary easing from the BoJ (expected to be announced at the end of October) and ECB (extending QE beyond September 2016) should support US Treasuries. 

"We expect the ECB to remain on hold but with an overall dovish tone. Furthermore, private capital outflows from emerging economies are also seeking US assets, albeit that we suspect this is with a preference for assets such as real estate", notes Barclays.