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A Bird's Eye View Blog

Fireside Charts: China Strikes Back by Letting Yuan Plummet to 11-Year Low, Emerging Markets Take a Hit, And More Signs of an Impending Slowdown

By:BCM Investment Team | Date:Aug05, 2019 | Category: Equity, Economics, Market Highlights, Fireside Charts

Last week's market unrest continues as China allowed the Yuan to sink to its lowest level in over a decade—an aggressive response to President Trump's proposal of a new round of 10% tariffs. The devaluation included allowing the Yuan to fall below the symbolic 7-per-dollar mark, suggesting that China is ready to embrace more aggressive tactics and settle in for a protracted trade war. However, in a public statement, the People’s Bank of China (PBoC) claims that it “wouldn’t weaponize the exchange rate” and that they are letting the market decide the exchange rate. Regardless of the factors behind the devaluation, we're reminded that Bloomberg Economics currently estimates the cost of an all-out trade war to the global economy at $1.2 trillion. All of this tension between the world's largest economies is also weighing on emerging market currencies, which are largely in decline due to the devalued Yuan and fears around economic growth. Bond yields across the globe are also suffering as many sink to unprecedented lows—including the German 30-year turning negative for the first time—as expectations rise for more aggressive rate cuts. A visit to "Dr. Copper" won't provide much relief from all this bad news, as the bellwether commodity hit its lowest level in over two years on Friday.

 

 

1. Make no mistake... this is an all-out trade war now. China "allowed" the markets to devalue the Yuan to an 11 year low. Remember what happened last time?

 

Source: WSJ Daily Shot, as of 8/5/19

 

 

2. Devaluing a currency brings other issues... If a currency is allowed to fall, then capital tends to find a more stable home...

 

Source: Haver, as of 8/5/19

 

 

3. Most EM currencies took a hit as a cheaper Yuan means cheaper prices for Chinese goods, which in turn makes others less competitive.

 

Source: WSJ Daily Shot, as of 8/5/19

 

 

4. Is this the message?

 

 Source: WSJ Daily Shot, as of 8/5/19

 

 

5. Where is this trend going?

 

Source: WSJ Daily Shot, as of 8/5/19

 

 

6. For those who think the Fed is too hawkish, remember they just ended their QE reversal two months early and with only 1/5th "reversed!"

 

Source: The Chart Store, as of 8/5/19

 

 

7. If copper's price is often a harbinger of future economic activity, then things are not looking so hot...

 

Source: The Chart Store, as of 8/5/19

 

 

 

With Trump's threats of additional tariffs and China's aggressive response over the weekend, it feels as if we've reached a turning point in the ongoing trade war saga. If the headlines are all starting to blend together and it's becoming hard to remember how this all started, take a moment to read our May 2018 paper: "Trade, Tariffs and Tirades: a Primer on What Has the Markets in a Dither." While we realize some of the information in this paper is somewhat dated, it offers both a high-level overview of tariffs and their efficacy, and a reminder of where we stood going into this fight.

 

 

Trade, Tariffs and Tirades

 

 

 

Disclosure: The charts and info-graphics contained in this blog are typically based on data obtained from 3rd parties and are believed to be accurate. The commentary included is the opinion of the author and subject to change at any time. Any reference to specific securities or investments are for illustrative purposes only and are not intended as investment advice nor are a recommendation to take any action. Individual securities mentioned may be held in client accounts.