The US stock market tries to return to growth after the collapse
The main topic of Monday was more than 2% decline in the Renminbi, caused by the escalation of trade disputes. Later States has increased the degree of tension, when the Secretary of the Treasury called China a “currency manipulator” for the first time since 1994. The toughening of rhetoric, provoked a sharp collapse of markets.
It was Monday – on Tuesday the people’s Bank of China tried to restrain the sale in local markets, setting higher-than-expected exchange rate of the national currency. Also this morning it was announced the sale of short-term bonds, potentially must support the demand for the yuan.
These measures were enough to globally affect the situation, but as Chinese markets are still traded in the red zone. Note that the measures support the national currency from China should not be regarded neither as a concession the American authorities, either as a conciliatory gesture in trade negotiations. The weakening of the yuan goes hand in hand with the instability of local markets, therefore, a sharp weakening of the national currency is not a blessing but a problem.
The reverse situation is happening now in the U.S. and many other developed countries. The weakening of the dollar, as a rule, nourishes the growth of stock markets and spurring consumer activity. While strengthening the USD – on the contrary, hinders the economy, reducing the attractiveness of investment in the business and suppressing inflation in the longer term.
A weaker yuan may be good for export-oriented Chinese economy, but only under the condition that the markets believe that the worst is over. Otherwise, the sharp falls, the currency can only further reinforce the shock and fear of the consequences of trade conflicts.
In our view, the need to keep the markets from a full-scale panic will force the Chinese authorities to act more actively. Although, if the politicians in China are ready for short term losses for longer-term goals, they can use the weakening of the national currency to enhance the competitiveness of Chinese goods on the world market. So in this case, the situation largely depends on what kind of perspective I expect the authorities of China.
The stock market
American SPX has lost over the Monday more than 5%. The collapse continued in the first hours after the opening of futures trading on Tuesday, bringing the index to the level of 2776. This is 9% below levels from which it started selling after the fed meeting. Immediately thereafter, however, the rate jumped up 2% and is now trading around 2836. Technically, the index received support after the failure below the 200-day mA, as it was in March and may.
The turbulence of financial markets has attracted buyers to the single currency. EURUSD jumped to 1.1245 today in early Asian deals. This is 2% above Thursday levels at the time of announcement of new tariffs. When markets calmed down, the pair returned to 1.1200, and this reduction can be developed in case of further rebound of the markets.
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