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Global Markets Ruffled After China Devalues Currency

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August 11, 2015

China’s latest efforts to shore up its economy set global markets spinning on Tuesday, including stock selloffs in Asia and Europe that look to spread to U.S. action. China’s central bank unexpectedly devalued its tightly controlled currency, sending spot yuan prices down nearly 2% for the biggest one-day loss in decades.

The policy change is an effort to make China’s exports more attractive globally and prop up its slowing economy. But several analysts quickly raised the notion of a “currency war,” one that’s likely to drive an elevated U.S. dollar even higher. In turn, that mindset kicked up some speculation in the financial press that the Federal Reserve might rethink raising its benchmark interest rate as quickly as September. A September move, while not guaranteed, looked more likely after a solid July jobs report earlier this month. The dollar’s strength against major global currencies has taken a bite out of U.S. exports and multinational company earnings in recent quarters. It’s likely that the Fed is watching the strong dollar’s effects on the economy as it debates whether to raise interest rates for the first time since 2006—a move that could make the dollar even more appealing relative to its peers.

This global market about-face comes on the heels of a strong day for the U.S. stock market (figure 1) to kick off the week—a bounce, in fact, that essentially wiped out last week’s losses and included some buying of recently maligned energy stocks. Crude prices renewed their retreat on Tuesday.

stock-chart-thinkorswim

FIGURE 1: MONDAY BOUNCE.

Monday’s corrective move higher for the broad S&P 500 (SPX) may prove short-lived as China currency action surprises global financial markets. With Monday’s close, the SPX cleared the closely watched 2100 line. Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Kraft Leaves Bad Taste for Street. Newly formed food conglomerate Kraft Heinz (KHC) is still getting used to ketchup on Mac N Cheese, apparently. Investors sent its shares down about 2% after a mixed earnings report featured disappointing revenue and the drag (no surprise) of a stronger dollar on global profits. The Kraft division's net revenues fell 4.9% versus a year earlier in part because of a 1.4% foreign exchange impact. Shares are up some 8% since the July combination, however.

Google Shakes it Up. Google (GOOG, GOOGL) is creating a new publicly traded parent company called Alphabet to make its many operations “ … cleaner and more accountable,” it said as part of a regulatory filing. Co-founders Larry Page and Sergey Brin will run Alphabet. Flagship Google will become a subsidiary of Alphabet with a new CEO: top Google executive Sundar Pichai. The post-bell news Monday sent shares up some 6% in late trading and again in early action Tuesday as a round of analyst notes largely endorsed the shuffle.

Greece Clinched a Bailout. Overnight talks in Athens resulted in another deal struck (with a few details remaining) between Greece and its international lenders, according to Reuters. The pact is reportedly expected to be worth up to 86 billion euros. Greek officials anticipate the accord to be ratified by parliament on Wednesday or Thursday and stamped by eurozone finance ministers on Friday. If approved, it clears the way for aid disbursements by August 20, the day a major debt payment comes due to the European Central Bank.

Good trading,
JJ
@TDAJJKinahan

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