August 21 2015
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 8/14/151-WeekY-T-D1-Year3-Year5-Year10-Year
- Standard & Poor’s 500 (Domestic Stocks)0.0070.0160.070.1420.1420.054
- Dow Jones Global ex-U.S.-1.50.1-184.108.40.206.1
- 10 Year Treasury Note (yield only)2.2NA220.127.116.11.3
- Gold (per ounce)2.3-6.8-14.9-11.2-7.89.7
- Bloomberg Commodity Index-0.1-13.4-28.1-14-7.3-5.8
- DJ Equity All REIT Total Return Index18.104.22.1681.1147.5
*Indices are unmanaged and investors cannot invest directly in an index.
*Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association
*S&P 500, Dow Jones Global ex-US, Gold, Bloomberg 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 Total Return 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.