Dollars and Sense: Trouble in China drives down U.S. markets, moods
by Warren Cole Smith
Posted 8/17/15, 12:48 pm
The Chinese currency. The Chinese government devalued its currency, the yuan, twice last week, and that had a major negative impact on U.S. markets. Lots of people accused China of playing unfairly. Two U.S. lawmakers in particular, Sens. Chuck Schumer, D-N.Y., and Rob Portman, R-Ohio, criticized China for the move. The irony here is that the United States has been criticizing China for years because it pegged its currency to other world currencies at an artificially high rate, rather than letting the yuan float on the world markets. In a way, China is doing exactly what the U.S. has been asking it to do.
Practical effects. The devaluation will make Chinese goods cheaper in the rest of the world, and will make the rest of the world’s goods more expensive in China. For companies like Apple and Caterpillar, companies that view China as a growth market, that’s a big blow. In fact, Apple stock has been down as much as 15 percent from highs earlier this year, and weakness in China has been a big part of the reason. A lot of people think the Chinese government wouldn’t be making this move at all if its economy wasn’t in real trouble. Last weekend we learned Chinese exports fell 8 percent in July. This move is clearly a response to that news and an attempt to kick-start the Chinese economy into greater growth.
Downward drift. Of course, you can’t blame all the troubles in the stock market on China. In the past two weeks, the Dow experienced a seven-day losing streak, a couple of days of up and down, and then more declines. The Dow is down nearly 1,000 points from its record highs in May. Though the currency devaluation was a jolt, the slowdown in China has not been a surprise, and that data has been getting baked into the markets. Corporate earnings continued weak. And with every passing month, we get one month closer to an interest-rate hike, though we still don’t know exactly when that will be. We should also note U.S. crude fell to a 52-week low last week: $43.04. That will bring lower gas prices to the pump, but it is hurting the economies of some western states that depend on stable oil prices for jobs and economic development.
Any good news? The economic news wasn’t all bad last week. Berkshire Hathaway’s decision to buy Precision Castparts was a good sign. The deal, valued at about $32 billion, was one of the biggest ever for Warren Buffet and a sign of his confidence in the economy. And the labor market seems to be improving, though at a slow rate. Last week’s report on first-time claims for unemployment benefits was better than expected. The four-week moving average fell to about 266,000, the lowest level in 15 years.
The week ahead. It will be a fairly quiet week for government reports, though we will get a couple worth watching. On Wednesday, we’ll get both the latest consumer price index number and the minutes to the July Fed meeting. We’ll also get some retail earnings reports over the next week. These few strategic reports should be interesting to watch.
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