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Yuan Warning

Posted by Joseph Trevisani on Oct 13, 2016 4:09:36 PM

China’s manufacturing engine continued to sputter as exports dropped by the most since February and imports registered their eighth negative month this year. Amid global economic weakness and faltering demand the yuan was fixed at its lowest level since 2010 on Thursday, inducing a worldwide sell-off in equities. 

In the twelve months to September dollar denominated Chinese exports fell 10.0 percent, according to the Customs Administration of the People’s Republic of China.   That was almost four times the 2.8 percent decline in August and thrice the -3.3 percent forecast. Imports dropped 1.9 percent in September. A 0.6 percent rise had been predicted. They have fallen in 22 of the last 23 months, the sole exception being a 1.5 percent increase in August.

In yuan terms, shipments declined 5.6 percent and imports rose 2.2 percent. Forecasts had been for a 2.5 percent rise in exports and a 5.5 percent gain in imports.  

 A substantial portion of China’s imports are not consumer goods or raw materials but components parts for the assembly of items that are later exported. China’s monthly trade surplus fell to $42 billion in September from $52 billion the prior month. 

The yuan was fixed by the People’s Bank of China at 6.7274 to the dollar on Thursday. That is the weakest the mainland currency has been since September 2010.  It has fallen 1 percent in four sessions this week following a week long Chinese holiday.  

Stocks around the world took their cues from China. In Asia the Japanese Nikkei 225 shed 65.76 points, 0.39 percent to 16,774.24. The Hang Seng in Hong Kong dropped 1.61 percent, 375.75 points to 23,031.30, for its lowest close since August 31st. In Seoul the Kospi Index lost 18.55 points closing at 2015.44, its worst finish since September 13th.  

In China both major exchanges rose slightly. The larger Shanghai Composite added 2.85 points to 3,061.35. The Shenzhen Composite gained 2.192 points to 2,049.311.

The Shanghai Composite had fallen almost 50 percent from a high of 5,166.35 in June 2015 to 2,655.661 this past February. For the past three and a half months helped by government purchases through various funds teh index has  stabilized near 3,000.  The Shanghai index has traded as low as 2,932.476 on July 1st and as high are 3125.195 on August 15th, with an average for the period of 3,036.228.  

In Europe the major exchanges were all in the red.  The FTSE in London lost 0.66 percent, the German Dax dropped 1.04 percent, the CAC 40 in France shed 1.06 percent and the Spanish IBEX 35 fell 0.90 percent. 

In the U.S the Dow recovered most of its early 185 point loss to close at 18,098.94, -45.26 points, -0.25 percent. The S&P 500 finished down 0.24 percent, -5.20 points at 2,133.98, having been down almost 25 points just after the open.

The yuan has lost 3.4 percent against the dollar this year and 6.2 percent against a 13 nation trade weighted index.

Since the Beijing government began its devaluation of the yuan a year ago in August when the currency was 6.2092 to the dollar, the pair has had three major legs down. That August, January and February this year and from April to July. Each time the yuan declined global equities fell, sharply in August 2015 and at the beginning of this year and briefly and mildly this June. But each time U.S. equities have recovered to find new highs.  This current bout of yuan devaluation and equity weakness has been the gentlest with the Dow losing about 2.8 percent from its mid-August top and the yuan slipping 1.5 percent.

Overall the yuan has lost 11.3 percent against the dollar since the 20 year high in January 2014. It has dropped 8.3 percent since August 2015 and 4.2 percent since March of this year.

Yet despite the obvious warning about the health of the Chinese economy encapsulated in the continuing yuan devaluation and its implication for global growth, equities have prospered.  Each devaluation delivered a diminishing shock and then stocks went on to find new highs.

With U.S., global and Chinese economic growth in decline, it remains to be seen whether the remarkable resurgence of equites can continue in the face of economic reality. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg






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