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Ships in the NIght? The sudden divergence of US Equities and the Chinese Yuan

Posted by Joseph Trevisani on Dec 20, 2016 2:44:46 PM

For almost a year and a half the Chinese Yuan and the S&P 500 Index have kept sympathetic company.

Beginning in August 2015 the devaluing Yuan has coincided with three rapid sell-offs in the equity indexes. Each time the Yuan moved first as the People's Bank of China (PBOC) raised the fixing rate against the dollar, lowering the value of the Yuan. 

In August 2015 the violence of the move took markets by surprise. The Yuan dropped 3.2 percent in just two days, August 10th and 11th. It was the sharpest jolt to the Yuan in a decade, since it jumped 2 percent on July 21, 2005 when the peg to the dollar was broken.

Though the Yuan had shed 2.8 percent against the dollar in the year and a half prior to last August, the carefully managed descent had lulled the markets with a sense of PBOC control.  The completely atypical shock engineered by the central bank was interpreted as evidence that the Chinese economy was in far worse shape that admitted by the government or priced by the markets. The equity adjustment would be extremely rapid. 

The collapse in the S&P 500 began about week later on August 18th. In just six sessions the index lost 11.2 percent, crashing from 2101.99 at the open on August 18 to 1867.61 at the close on the 25th.  As the Yuan recovered about half its losses in the next two months to 6.3174 on October 30th, so the S&P returned to 2109.79 by November 3rd.  

A similar reaction happened at the end of the year. From December 25th to January 8th the Yuan lost 1.9 percent against the U.S. currency.  And again, beginning a few days later on the 29th, but continuing much longer to February 11th, the S&P dropped into correction losing 12 percent. 

The final sympathetic vibration occurred this past summer, though the duration and the size of the losses reversed. The Yuan dropped for six weeks, from June 3rd to July 18th, and the size of the decline jumped to 2.4 percent.  

The S&P fell fitfully for just under three weeks, losing a total of 5.6 percent. But the bulk of that drop, 4.9 percent, came in the last two sessions June 25th and 27th, after which the market swiftly reversed and regained all that it had lost in just three sessions, finishing at 2098.86 on June 30th.

However since November 4th, the Friday before the U.S election, the association has been severed.

The Chinese Yuan has continued to devalue against the dollar, losing 2.9 percent in the period.

 American enquiries, however, have been on skyrocket.  The S&P 500 has gained 4.6 percent and the Dow an astonishing 11.6 percent, (2:30 pm ET Tuesday). 

In the balance between the global impact of a weak Chinese economy and the hoped for benefits of a new administration in Washington, U.S. equities have chosen to go with what they know.  


Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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