100-yuanChinese Currency Adjusts Downward

Stock markets in the United States got off to a good start last week, heading higher before stumbling over China’s currency news.

China, which has one of the world’s largest and fastest growing economies, is experiencing a slowdown in economic growth. The Economist reported data released last week showed, “…an 8 percent fall in Chinese exports in July and a 5.4 percent drop in factory-gate prices. Output prices have fallen for 41 straight months, a symptom of overcapacity in much of China’s heavy industry.” MarketWatch suggested China may be in (or on the verge of) recession.

In an effort to slow its slowdown, China announced an unexpected devaluation of its currency, the renminbi, last week. Don’t confuse the terms renminbi and yuan. Renminbi is the name of China’s currency. Yuan describes a unit of that currency. For instance, when shopping in China, you would not ask how many renminbi you owed, you would ask how many yuan you owed.

Barron’s questioned whether China’s relatively small currency adjustment would be enough to help its economy and speculated last week’s devaluation could be the tip of the iceberg:

“One wonders what a 3 percent adjustment in the yuan will do to spur China’s economy… To a longtime observer of finance ministers and central bankers, the claim that the initial moves to tweak currencies will suffice is a familiar refrain. The larger the underlying imbalance, the larger the eventual exchange-rate adjustment.”

A Fed spokesman told The Wall Street Journal China’s new currency policy has significant implications for the world economy and it probably won’t affect the Fed’s impending rate hike.

The currency devaluation didn’t have a sustained affect on U.S. stock markets last week. Major U.S. stock markets finished the week higher. China’s benchmark national index was up for the week, too.


Data as of 8/14/15

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

0.7%

1.6%

7.0%

14.2%

14.2%

5.4%

Dow Jones Global ex-U.S.

-1.5

0.1

-7.6

5.1

3.3

2.1

10-year Treasury Note (Yield Only)

2.2

NA

2.4

1.7

2.6

4.3

Gold (per ounce)

2.3

-6.8

-14.9

-11.2

-7.8

9.7

Bloomberg Commodity Index

-0.1

-13.4

-28.1

-14.0

-7.3

-5.8

DJ Equity All REIT Total Return Index

1.5

0.6

8.5

11.1

14.0

7.5

S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

*The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.  You cannot invest directly in this index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* “Chinese Currency Adjustment”

Sources:

http://www.economist.com/news/leaders/21660979-emerging-markets-are-being-squeezed-americas-recovery-and-chinas-slowdown-stuck-middle (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/08-17-15_TheEconomist-Stuck_in_the_Middle-Footnote_1.pdf)

http://www.reuters.com/article/2015/08/11/markets-money-idUSL1N10M14X20150811

http://www.marketwatch.com/story/why-china-may-be-on-the-brink-of-recession-2015-08-12

http://www.bloomberg.com/news/articles/2015-08-14/range-rules-as-u-s-stocks-post-weekly-gain-after-china-turmoil

http://www.npr.org/sections/money/2010/03/wait_whats_the_difference_betw.html

http://online.barrons.com/articles/chinas-yuan-could-fall-10-or-more-1439617207?tesla=y&mod=BOL_twm_ls?mod=BOL_hp_highlight_1&cb=logged0.7030657494906336

http://www.wsj.com/articles/dudley-monetary-policy-alone-cant-solve-labor-market-structural-imbalances-1439382731

http://online.barrons.com/mdc/public/page/9_3063-economicCalendar.html?mod=BOL_Nav_MAR_hpp (Click on U.S. & Intl Recaps, International Perspective, “A mid-August jolt”, scroll down to the Global Stock Market Recap chart)

 

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