Stocks Rally But Fail To Impress As China’s Currency Weakens

The stock market rebounded some on May 14 rising by about 0.8% on the S&P 500. It had been up by over 1% throughout most the day but gave back some by days end. The catalyst centered around President Trump dangling some optimism around the trade war. In my opinion the less focus there is on the topic the better, out of sight out of mind. It has been my experience in the past the market has a very short-term memory on events, and the sooner it can be distracted by other topics, the better off we are.

Trade War

I continue to believe there will be a small impact on the US economy and the global economy due to these tariffs or a potential trade war. Frankly, the US doesn’t export much to China. As for the poor consumer in the US that everyone thinks will foot the bill, don’t worry China is already taking care of that part.

One needs to look no further than the rapid devaluation of the Chinese yuan to the US dollar.  From May 3 to May 14 the yuan has dropped by over 2% against the dollar. It is almost as if China knew this was coming because the yuan started to devalue in the middle of April. Since the middle of April, the yuan has fallen by around 3%. If you don’t think they are playing games with the currency, I think you may be mistaken.  Notice how the yuan started to devalue in April of 2018, right around the same time the tariffs began to go into effect. It continued to depreciate right through December 3, which was around the time of the G20 summit, to the tune of 11%.  That was when it began to strengthen again, well until just the last few days and weeks.

Please remember that China does not have a free-floating currency. They set a mid-point price every day, and that mid-point has a 2% band for the currency to trade up or down. This is not the Euro, GBP, or the Dollar.

Cheaper currency, cheap goods, nothing to worry about.  Of course, there is some sarcasm there.

china yuan

I thought I should note that the Euro has also declined by about 10% since April 2018. However, you can see it has happened in a far more orderly manner, which has the marks of a market. It isn’t as if it has suddenly started to weaken.  Anyway, that is my point of view, agree or disagree. 

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Disclosure: Michael Kramer and the clients of Mott Capital own Netflix, Amazon

Disclaimer: This article is my opinion and expresses my views. Those views can change at a moment's notice ...

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Gary Anderson 5 months ago Contributor's comment

The author is looking at the US consumer being helped by the weakening Chinese currency. Good for the consumer. But most American goods can be replaced in the Chinese market. This will rip through the US export business, which had been growing before Trump started screwing around with tariffs. This will likely increase the trade deficit, the opposite of what the smartest man on the planet wants!