Monday, October 24, 2016

Yuan Stealth Devaluation

The Chinese have decided to support their economy by devaluing their currency.  It is the simplest thing for them to do.  They surprised the market in August 2015 when they started in earnest, but now it is expected and it doesn't worry the market.  Theoretically, Chinese devaluation would lead to lower costs for Chinese goods and thus deflation.  But that is only if the yuan prices of those Chinese goods stay the same.  I am sure they will rise in yuan, to neutralize any effect on dollar weighted prices.

It is a classic money printing exit to a massive debt bubble, and should help to prolong the collapse of the bubble by several months.  That gives the global equity markets enough runway to keep rising higher before the eventual drop.

I am surprised to see such a strong Monday but this market doesn't trade with much rhyme or reason these days.  It is just pinging back and forth between 2130 to 2160.

Bonds continue to trade heavy, and you have seen very little value buying up here around 1.75% 10 year.  I am seeing more and more investors move over to the bond bear camp, and it is something I expect to continue in the coming months.  This migration from bond bullishness to bond bearishness still has a ways to go.  The cloud of ECB taper and potential fiscal stimulus with Clinton weighs heavily on this bond market.

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