The fear mongering was out in full force this morning as the Chinese yuan dropped significantly before China intervened to support their currency. That activity had the speculators out and the headlines full of fear factors. The impact on the US financial sector was the most notable. Banks were down more than 3% across the board with a small bounce off the lows, but this is definitely the trouble spot for now. All the good done in the sector from the believed rate hike by the Fed has all been erased. In reality this whole picture has shifted relative to the Fed, banks and the markets.
The relationship previous to China was the Fed would hike interest rates prior to the year end and that action in turn would be positive for banks bottom line, thus stock prices in the sector would rise on higher profits. The challenge came with the rest of the market and how the economy would react to the hike in rates. Thus, stocks were struggling in a trading range and bonds were declining due the higher rates impacting the value of bonds.
The relationship now, with China devaluing currency as part of the mix, shifted the landscape to banks selling off. Rationale – the Fed would have to delay hiking interest rates as a result of China and not wanting to add to the global economic issues currently relative to the dollars response. An additional issue to be considered is the banking sectors exposure to the Chinese equity markets… banks, etc. If the Fed doesn’t act on raising interest rates bonds will rally, and in fact, they have the last couple of days. Why the drop in stock prices? Uncertainty about product and services exported from the US companies. They have already struggled with a strong dollar and this is seen as another nail in the economic coffin for the US. Thus, we have added two new dimensions to the equation and that has sparked uncertainty in the US markets. The natural response to the uncertainty is to sell stocks. Given time we will get a clearer picture on the impact, but for now the response has been sell now, ask questions later.
Does it last? That will depend on how much China lets the yuan devalue. It will also depend on what the Fed chooses to do relative to hiking interest rates in light of the new data. This puts us right back on the merry-go-round we have been trying so diligently to get off of. UNCERTAINTY about what lies ahead as it pertains to the Federal Reserve, interest rates, the dollar, oil prices and the US economy make up the merry-go-round. Now we have to add the worry about China and the impact globally if the Fed stays the course as it pertains to interest rates. Oh what a tangled web China weaves to deceive the world about it’s currency. 🙂
The fact we managed to bounce off the intraday lows was one positive to take away on the day. Despite the bounce the Dow Jones Average death cross of the 50 & 200 DMA was not a good sign for the markets overall. It is concerning when you consider historically that is a decisive factor in how the broad indexes perform moving forward. The 50 DMA on the S&P 500 index is trending lower as a result of the uncertainty in direction. Should this continue the cross of the 50 below the 200 DMA will take place in the next couple of weeks. The point is simple uncertainty short term is shifting the longer term trend. If the long term trendlines break it generally leads to more selling or a correction mode for the broad indexes. Thus, why all the worry and jumping ship today.
Bottom line for today… patience (you knew it was coming) enough to let the direction unfold. The downside momentum is a concern. The economic picture is a concern. The actions taken by China are definitely a longer term issue that is a getting a short term reaction. Focus, define you strategy, manage the risk and don’t believe everything you read. Focus on the facts as they relate to the trendlines. Nothing more. Nothing less.