CHINESE YUAN TUMBLES TO LOWEST LEVEL SINCE 2008 -- STOCKS DROP AROUND THE WORLD -- MAJOR U.S. STOCK INDEXES MAY BE HEADED TOWARD THEIR 200-DAY AVERAGES -- EMERGING MARKETS ISHARES ARE THREATENING THEIR MAY REACTION LOW
CHINA DEVALUES YUAN IN RESPONSE TO NEW TARIFFS...It didn't take long for China to retaliate against last Thursday's announcement of a new U.S. tariffs on Chinese imports starting on September 1. Those tariffs are a tax on Chinese imports which raises their price. Today's devaluation of the Chinese currency offsets some of that effect by making China's imports cheaper. Chart 1 shows the Chinese yuan plunging to a new low against the dollar today. It now takes more than 7 yuan to buy one U.S. dollar for the first time in more than a decade. The yuan is now worth less that its last devaluation that took place during 2015 (which also rattled global markets). Not surprisingly, today's devaluation has rattled financial markets around the world again today.
A steep selloff in Asian stocks spread to Europe and then to the U.S. Emerging markets are leading the global retreat. Major stock indexes in the states are falling sharply. So are Treasury bond yields as investors flee to the safety of bonds. Gold is trading at a another six-year high. The price of copper, which is closely tied to the Chinese yuan, has fallen to a new low for the year. Agricultural commodity prices are also falling after China suspended purchases of U.S. agricultural goods. Energy prices are also down again.
STOCK INDEXES DROP SHARPLY...Major U.S. stock indexes are suffering big losses this morning. The next three charts show them falling well below their 50-day averages (blue lines). A retest of their 200-day averages now appears likely (red lines). And possibly even their early June lows. The tech-heavy Nasdaq is leading the selling. All eleven sectors are in the red today, with the biggest losses in technology (especially semiconductors). Heavy selling in retailers and toy stocks is hurting consumer discretionary stocks. Weak bank stocks are hurting financials. Safe havens like utilities, staples, real estate, and healthcare are holding up better. Gold mining stocks are the strongest part of the materials sector; while stocks tied to copper are the weakest.
EMERGING MARKETS THREATENS ITS MAY LOW...Chart 5 shows the MSCI Emerging Markets iShares (EEM) losing more than -3% today, and falling further below its red 200-day average. It's being led lower by stocks in China. The chart shows the EEM gapping sharply lower today (second red circle); and threatening its previous low hit during May (first red circle) during the last trade spat which also led to a correction in U.S. stocks. That's an important test. A decisive drop below that earlier low would not only turn its trend lower; it might also signal that this new pullback in stocks could be even more serious.
