US to open lower - China’s second “one-off” FX adjustment rattles markets
Everything that was sold off yesterday after the shock of the first Chinese devaluation of its currency can expect another day of misery after the second one. The People’s Bank of China lowered the dollar-yuan fix by 1.6% to 6.3306 on Wednesday, adding to the 1.9% seen on Tuesday.
China’s second devaluation doesn’t have the same shock value but puts a big dent in the theory that Tuesday was just a one-off technical adjustment and not China joining the global currency war. If it is China using FX as a way to stimulate exports, more devaluation should be expected, piling the pressure on emerging currencies, commodities and US / European exporters.
The latest data from China was supportive of a need for competitive devaluation of its currency. Annual growth in retail sales and industrial production both slowed more than expected.
Luxury retailers and car manufacturers in Europe such as Burberry and BMW are extending losses thanks to the double whammy of currency devaluation and weak Chinese economic data. Their American competition will likely see the same. The Dow Jones has the biggest concentration of multinationals and as such is looking the weakest of the US indices with a re-test of 17,000 on the cards.
The China-centred internet company Alibaba reports earnings on Wednesday. The share price is already at the lowest it’s been since the day of its IPO, having lost over 30% of its value. The company is attempting to diversify internationally but it gave up on its US website and most of its revenues still come from China. The devaluation of the yuan would be a benefit for Alibaba if it had more international business with foreign earnings to repatriate. Alibaba operates in ecommerce, one of the fastest growing areas of China’s economy but overall China’s economy is slowing and as such sales are expected to slow.
Futures suggest the:
S&P 500 will open 23 points lower at 2,061 with the
Dow Jones expected to open 178 points lower at 17,224 and the
Nasdaq 100 51 points lower at 4,464.
CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.