Surprise! China devalues yuan, U.S. stocks take a nosedive

Shock currency move further evidence of Chinese economic stability, international commodity deflation. Oil takes another big hit.

Wile E Coyote is back again, telling us which way stocks are going this morning. (Warner Bros. character, mod by the author)

SILVER CITY, N.M., Aug. 11, 2015 — Greetings from sunny, DSL-connected Southern New Mexico, where we’re wrapping up our two-week sojourn later this week. We’ve been a bit disconnected from the markets as well, but noticed with delight Monday’s rally, which was just the thing after a rotten week of negative returns.

But just in time to spoil the fun, that puckish Chinese Communist government has decided to get markets back in a pickle again by devaluing the yuan, courtesy of the People’s Bank of China (PBoC). Sources note this 2 percent devaluation is its biggest in recent memory. Down we go! Ain’t fiat money fun?

“I think it’s screaming that China is in trouble. … The Chinese leadership is really starting to run scared,” stated Boris Schlossberg. The managing director of foreign exchange strategy at BK Asset Management made this observation in a CNBC interview Tuesday morning.

As of 9 a.m. Tuesday MDT (11 a.m. EDT), the Dow is off a nasty 200 points, pretty much wiping out yesterday’s rally there. Results in the other major averages are equally nasty, with the broader-based S&P 500 down 20 and the tech-centric NASDAQ down a scary 50 points, likely due, at least in part, to the heavy Chinese-dependence of that sector, due to both manufacturing and consumption.

Worse still, the Chinese devaluation adds to deflationary fears, as reflected in the price of key commodities. Oil, in particular, is getting smashed this morning, with the price of West Texas Intermediate (WTI) off a buck ninety at $43.06 bbl., a whopping 4+ percent from Monday’s close.

Although we’re out in the hinterlands and can’t check our stats, this would break its previous low of $44 and change, set earlier this year, setting it on the way to reach the Maven’s lower-range estimate of $40 bbl. Oil stocks are not happy and are being taken out to the woodshed this morning.

All in all, our pre-vacation advice of keeping portfolios mostly in cash right now seems to be holding true. This market has become too wacky and irrational to trust. We still like banks longer term and are holding our positions there, but our remaining oil-patch gambles… well, the house seems to be winning right now, although hits to the refiners are irrational, as they’ll sell more and more refined product as prices grudgingly head down at the pump.

But the Chinese devaluation has apparently gripped the markets with stark terror this morning. Among other things, it’s clearly a deflationary sign, and may ultimately influence the Fed to hold back on that ever-looming interest rate increase.

The only good news this morning appears to be in U.S. bond yields, which are lower this morning. If this persists, we might get a boost for new and refinanced mortgages, but we won’t count our chickens just yet.

No trading tips today or for the remainder of the week. Clearly, the dust needs to settle on this one. And the Maven needs to get back to Washington and faster connectivity. And Eastern Daylight Time.

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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17