Is this the beginning of a currency war?
Ruins of Guernica. Photo: Bundesarchiv, Bild 183-H25224. Source: Wikipedia
It sure feels like it. The Chinese devalued, then Malaysia, Vietnam, and Kazakhstan. Asian stock markets have hit the skids, impacting other markets around the world. The Dow has fallen over 10% since it peaked in May. In the face of the market’s turbulence the Fed may have to put off raising rates.
China’s modest devaluation initially seemed a normal reaction to the rise in the Dollar, which had gone up over 20% in the past year. The Renmimbi is tied to the Dollar, and China’s economy has been slowing. But now further doubts are spreading. China’s exports were down 8% in July from a year earlier. Chinese authorities had been intervening to keep stocks from crashing, but their market has continued to fall.
Are we headed for a new bear market? There’s no question that China’s stock market bubble has popped. Its recent fall has erased all of the gains from 2015. Will this affect consumers? Chinese stocks represent only 7% of urban Chinese household wealth. China’s economic slowdown has been driven by traditional industries.
This is what a correction feels like. Our economy continues to grow, and Europe’s will be strengthened by the fall in oil prices. Market analysts had noted that we were long overdue for a 10% pullback. In fact, the last time the market fell significantly, in 2011, many analysts thought the US was headed for a double-dip. At present, no one thinks that we’re headed that way. And China, while slowing, is still growing.
In a trade-dominated world, currencies have to adjust to reflect their underlying economies. So far, the adjustments have been modest. But if countries start to compete to devalue, that’s a competition that no one will win.
Douglas R. Tengdin, CFA
Chief Investment Officer