US markets are expected to be led lower at the open by big exporters to China including luxury goods-makers and carmakers after China devalued its currency by lowering the daily fix to the US dollar by 1.9%.
China’s renminbi has been dragged higher in the last twelve months despite an underperforming economy because of its peg to the US dollar, which has been gaining on expectation of higher interest rates in the United States. A stronger renminbi contributed towards a slump in Chinese exports in July so Chinese authorities have addressed the issue directly through currency devaluation to make China’s exports relatively cheaper abroad.
The initial reaction amongst commodities and oil and mining shares was to drop because of the rising US Dollar. That move is getting reversed given the stimulus the devaluation could provide to China’s economy. If the devaluation does have a material benefit to the economy, it may reduce the need for infrastructure development which could be a net negative for commodity demand in the long run.
Broadly the reaction to China’s devaluation has been that of a risk-off move into Gold and treasuries, simply because it was unexpected. The move into treasuries may also reflect a belief that the action from the PBOC makes monetary tightening from the Fed more difficult. A devalued yuan makes the dollar stronger, further weighing on US exporters and is also a reaction to China’s weak economic position which is a negative for global growth.
Greece has agreed on the terms of a third bailout package with its creditors but the news has been brushed to the sidelines because of the news from China. Markets rallied on Monday after talk circulated that a deal was near-done. It is however an outline for a deal, so more detail is needed and a few more hurdles need to be jumped.
Given the current desperate state of Greece’s economy, creditors have caved-in on budget surplus requirements, formerly a big sticking point in negotiations. 2015 is forecasted to see a budget deficit of -0.5% while the surpluses expected in 2016 and 2017 are significantly reduced. The first tranche of new bailout funds look like they will be released in time for theaugust 20 payment to the ECB. Greece needs to implement as many as 35 “prior actions,” the term used for immediate reforms that must be passed by law in Greece, and national governments must vote on the agreement.
Google (NASDAQ:GOOGL) is expected to be a top riser when US markets open as investors react well to news the company is reorganising into a new holding company called ‘Alphabet.’ The idea is to differentiate its core search engine business from its more obscure investment arms and R&D projects.
For the final quarter of this year, the company will report the results of its search and advertising business separately from its other businesses. Transparency is good for the long term prospects of the shares. The difficulty would be if the umbrella structure encourages bigger investment into the more obscure, riskier projects which could dampen the consistent profitability of the core business.
Futures suggest the:
S&P 500 will open 10 points lower at 2,094 with the
Dow Jones expected to open 86 points lower at 17,529 and the
Nasdaq 100 11 points lower at 4,562.
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