“What is it Good For?”

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

By |2017-07-17T12:22:40+00:00August 24th, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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