China lets yuan fall further, fuels fears of currency war
Stocks, yields tumble after China pushes yuan lower again
China Intervenes to Support Tumbling Yuan China intervened to prop up the yuan in the last minutes of trading, according to people familiar with the matter, in an apparent attempt to prevent an excessive fall in the currency.
The yuan had dropped nearly 2%—the maximum allowed in mainland China—to its lowest level against the dollar in four years during mainland trading, with one dollar buying about 6.45 yuan, as the People’s Bank of China followed through on its pledge to let market forces play a bigger role in determining the yuan’s value. To that end, the central bank set Wednesday’s reference rate for the yuan based on the currency’s closing level in the previous trading session. (…)
But the move led to more selling of the yuan, and a statement by the central bank earlier in the day trying to reassuring investors that there was “no economic basis” for continued yuan depreciation largely failed to stabilize the market.
The PBOC then instructed state-owned Chinese banks to sell dollars on its behalf in the last 15 minutes of Wednesday’s trading, according to the people. The result: The yuan jumped about 1% in value against the dollar in the final moments of trading, bringing it to a level where one dollar would buy 6.3870 yuan.
The PBOC then instructed state-owned Chinese banks to sell dollars on its behalf in the last 15 minutes of Wednesday’s trading, according to the people. The result: The yuan jumped about 1% in value against the dollar in the final moments of trading, bringing it to a level where one dollar would buy 6.3870 yuan.
The Chinese currency is now down 2.8% since Monday’s closing.
China Economic Data Underwhelms Once Again July industrial output figures add to growing signs of weakness in China’s economy
Value-added industrial output rose 6% in July from a year earlier, the statistics agency reported, down from a 6.8% year-over-year increase in June and below the median 6.6% forecast by economists in a Wall Street Journal survey.
Fixed-asset investment in nonrural areas rose 11.2% in the January-July period from a year earlier, weaker than the 11.4% increase posted in the January-June period, it said. Retail sales growth edged down to 10.5% in July from June’s 10.6% increase. (…)
While housing sales between January and July rose 16.8% year-over-year, compared with a 12.9% gain in the first half of 2015, commercial and residential building starts fell 16.8% in the first seven months, compared with a 15.8% decline in the first half, the statistics bureau said Wednesday. (…)
Global Stocks Fall Further on China Concerns about China’s economy rippled through global markets, sending stocks sharply lower and putting pressure on some currencies.
(…) The Stoxx Europe 600 index was down 2.0% late morning in Europe, with Germany’s exporter-heavy DAX index falling 2.1%. The declines mirrored a slide across the board in Asia, where Hong Kong’s Hang Seng Index fell 2.4%, Japan’s Nikkei 225 index dropped 1.6% and China’s Shanghai Composite Index was down 1.1%.
Metals prices and Asian currencies sank and shares in companies that rely on sales to China dropped. Haven U.S. Treasury bonds climbed.
Shares in car maker s, luxury goods firms, and mining companies—sectors highly sensitive to demand from China—were among the hardest hit.
A weaker yuan could hurt the competitiveness of firms outside China by making their goods and services relatively more expensive. Companies that sell goods in China could find revenue generated in yuan is worth less in their home currency.
Copper, aluminum and nickel prices all hit more than six-year lows, while zinc hit a near four-year low.
For the quarter ended June 30, revenue grew 28% to $3.26 billion, missing analysts estimates for $3.39 billion.
Shares of the company fell 6.2% to $72.55 in premarket trading. Through its Tuesday close, the stock has risen 14% since its initial public offering price of $68 in September, but it is far from its high of $120, reached in November.
Currency Rout Goes Global as Jen Sees Risk of 50% Loss on China Yuan’s devaluation changes the FX landscape
As bad as things are for emerging-market currencies, China is about to make them a whole lot worse.
Its devaluation of the yuan risks a new round of competitive easing that may send currencies from Brazil’s real to Indonesia’s rupiah tumbling by an average 30 percent to 50 percent in the next nine months, according to investor and former International Monetary Fund economist Stephen Jen. (…)
“The emerging-market currency weakening trend is now going global.”
Latin America is a particular concern because of the region’s high levels of corporate debt, said Jen, who predicted the 1997 Asian crisis as a strategist at Morgan Stanley. (…)
Strategists surveyed by Bloomberg anticipate declines in 19 of the 31 leading emerging-market currencies by the middle of next year, with those from Latin America and Eastern Europe seen as the biggest losers.
Declines will be exacerbated by “a confluence of cyclical and structural factors,” according to SLJ’s Jen, who pointed out that global growth is slowing and said the record $9 trillion owed by sovereign and corporate borrowers outside the U.S. will create demands for dollars.
Morgan Stanley cautions against being too bearish. Investors betting currencies will weaken should limit their potential losses because China will follow its devaluation with fiscal-stimulus measures to boost the economy, its strategists said Tuesday in a note. (…) (First chart from Bespoke Investment, next 2 from Ed Yardeni)
During June, the index for the 34 advanced economies that are members of the OECD fell to 100.0, the lowest reading since June 2013. Among the weakest components of the overall index is the US LEI, which fell to 99.4, the weakest since November 2011. Sorry, that doesn’t make any sense to me. Making more sense is the LEIs for the BRICs, which all remained below 100 during June.
And this chart from BloombergBriefs…
China Devaluation Path Could Worsen Dollar Drag on Growth
and this from Mohamed El-Erian:
(…) With this move, China explicitly joins other nations trying to capture economic activity outside their borders, and it is doing so as the global economy is struggling to generate sufficient growth. The decision therefore provides many signals about what ails China and the global economy, and has implications for financial markets. (…)
China’s decision leaves the U.S. as the only systemically important country willing to accept the strengthening of its currency. But what may work for individual countries cannot work for the system as a whole; and that has implications for financial markets.
The timing of China’s policy decision signals that one of the largest and most systemically important economies is no longer in a position to play its longstanding role as a locomotive of global growth. The tailwind China has provided other countries now risks becoming a headwind. (…)
Excessive dollar appreciation is one of the concerns highlighted by the Federal Reserve as a possible counterpoint to the growing list of domestic reasons to increase U.S. interest rates as early as September. (…)
…which lead to this:
Dollar Tumbles As Fed Rate Hike Suddenly Looking Very Uncertain To Goldman, Bank Of America
U.S. Steelmakers Again Ask for Tariffs on Imports Target is hot-rolled coil from Australia, Brazil, Japan, South Korea, the Netherlands, Turkey and the U.K.
(…) and warned that China’s devaluation of the yuan could have severe repercussions on their industry.
Six of the nation’s biggest steelmakers— U.S. Steel Corp., Nucor Corp., AK Steel HoldingsCorp., ArcelorMittal USA LLC, SSAB Enterprises LLC and Steel Dynamics Inc.—filed their third trade complaint of the summer, as they attempt to stem what Nucor Chief Executive John Ferriola has called a “tsunami of foreign imports.”
(…) the U.S. already has tariffs on imports of that kind of steel from China.
The problem for U.S. steelmakers is sluggish prices, which are held down by inexpensive imports. The U.S. index price for hot-rolled coil, a benchmark product, has fallen more than 20% this year to $468 per ton.
That is still about $100 higher than the price in Europe and $200 above that in Asia, according to steel buyers, making the U.S. a tempting market. (…)
Maybe the U.S. steel industry has a severe cost problem. What else is new?
Sputtering Worker Productivity Vexes Economy U.S. worker productivity is advancing at one of its worst rates on record, frustrating prospects for a sustained economic acceleration more than six years into the expansion.
The productivity of nonfarm business workers, or the output of goods and services per hour worked, increased at a 1.3% seasonally adjusted annual rate in the second quarter, the Labor Department said Tuesday. That gain followed two consecutive quarterly declines. From a year earlier, productivity was up just 0.3%.
Annual revisions, also released Tuesday, showed recent gains were even weaker than previously estimated. For example, labor productivity was flat in 2013. The Labor Department’s prior reading was a 0.9% improvement. Over the past five years, productivity has grown at just 0.4% annual pace—the weakest advance since the early 1980s.
The productivity figures help explain “why the labor market has tightened so much over the past five years despite what was considered at the time to be tepid GDP growth,” said Amherst Pierpont Securities economist Stephen Stanley. (…)
“We’ll need a large improvement in labor productivity from the past five years’ trend to get close to even a sustainable 2% GDP trend,” said Morgan Stanley economist Ted Wieseman. (…)
Tuesday’s report showed a gauge of compensation costs, unit labor costs, increased at a 0.5% annual rate from April through June. The measure, which is adjusted for productivity gains, was up 2.1% from a year earlier.
The compensation figure matches with other measures of pay in showing some modest firming this year. Average hourly earnings, which isn’t adjusted for productivity, grew 2.1% from a year earlier in July. (…)
The article says that the recent productivity gains were well below the long-term average of 2.2% per year since the end of World War II. But that misses the fact that average U.S. productivity growth has been 1.4% since 1975 as this chart from RBC Capital illustrates. Meanwhile, other industrialized countries have seen their productivity slow even more.
Meanwhile, in the USA, mortgage apps for purchase are rolling over again…(Chart from CalculatedRisk)
Oil Demand Growing at Fastest Pace in Five Years, Says IEA Demand for oil is increasing at its fastest pace in five years, boosted by an oil-price drop below $50 a barrel, a top energy watchdog said.
(…) In its closely watched monthly report, the IEA said global oil demand would grow by 1.6 million barrels a day this year, an upward revision of 200,000 barrels a day from its previous forecast, and would keep rising by 1.4 million barrels a day next year. The organization—which advises industrialized nations on energy—said consumers were responding to lower oil prices while macroeconomic prospects were better than expected.
“Oil’s plunge below $50 barrels a day from triple digits a year ago has seen demand react more swiftly than supply,” the IEA said. “Against this backdrop, many participants in the oil industry have adopted a new mantra – ‘lower for longer’.”
The news comes after OPEC also upgraded its oil consumption views for 2015 in a report Tuesday. Global oil demand is expected to grow by 1.38 million barrels a day this year, some 90,000 barrels a day more than it previously expected, the oil producers’ cartel said. (…)
Supply outside OPEC is expected to decelerate but it has yet to fall. Non-OPEC production growth is expected to slow from a 2014 record of 2.4 million barrels a day to 1.1 million barrels a day this year, the IEA said. But it will only start declining—by 200,000 barrels a day—in 2016. Most of the drop will come from Russia as U.S. production will continue rising—by about 190,000 barrels a day—next year, the agency also said. (…)
Canadian oil sands crude halves in price Prices drop 50% in six weeks to $23 a barrel
This week, Western Canada Select, a marker for heavy, diluted bitumen from Alberta’s oil sands region, fell to $23. It was less than half the price of Brent, the global oil benchmark listed in London.
A combination of steadily rising production, pipeline constraints and a surprise outage at a US refinery explain the 50 per cent fall in Canadian oil since July 1. (…)
The discount of Western Canada Select to US benchmark West Texas Intermediate crude this week widened to nearly $20 a barrel, the most in a year, according to Bloomberg data. Canada is the largest foreign crude supplier to the US. (Chart from FT)
