I trade the markets, and I've found an unsettling development this week. Where last week I found the markets respond in deep decline to China's currency devaluation, that same market came back the next day in a seriously bullish action. In fact, the market closed up considerably. This last price action happened on Wednesday of last week.
Since Thursday of last week, the major indexes are flat. Essentially, the bulls showed major resilience, but no capacity to follow-through over a few days now. Same with the bears, which got their back broken on Wednesday of last week.
Otherwise for the Dow, Walmart guided down and Home Depot outperformed. I think Disney was downgraded, by someone (ESPN cable issues). Disney owns the franchise. Yet, the only proprietary franchise merchandise I care to get off ESPN is during college football season (cancel and reconnect).
Looking at Monday, the indexes were up and finished with a little rally at the close. That looked bullish going into Tuesday, and looked promising for a follow-through increase. But on Tuesday morning, the indexes were down, and finished the day down, and more pointed is the indexes were down only marginally.
Today of August 19, for the first time in several days, a significant decline was observed in all indexes. Such a decline was not linear. Rather, the decline occurred after a major rally, but the push up ended in considerable decline given the range since last week.
Causation certainly appears to be China and it's stock index losing 6% on Tuesday, only to lose 4% today but find a 1% gain at closing today. This leads to the appearance of the Chinese government support of their stock market not being the salvation once thought.
Probably more concerning is that the People's Bank of China released more money to their associated central banks than since January 2014. That by itself is meaningful. Especially when this release of funds occurs at a time after a currency devaluation.......How much money did China expend in preventing a collapse of their currency. How much more money will be needed for a second resetting down of currency price.
Perhaps an appropriate question is whether China devalues again. Market pressures seem to want more devaluation. And, China wants their currency to reflect markets. Their stock market, however, isn't so much based on a market. Large stock holders can't sell and the government today took a step back on Tuesday from supporting prices. Perhaps China's troubled state owned enterprises are buying stock to support the market. Yet, if China follows the policy of their currency, and remain consistent with their stock market intervention limitations, that stock market is going to follow market influences in a fashion similar to their currency.
Further Chinese yuan/renminbi devaluation only increases the cost of China's bloated foreign currency debt. It also makes China's exports comparatively cheaper. Between the two "onlys", which is more powerful?
By devaluing a currency, a country makes debt burdens more difficult for domestic businesses that hold foreign, especially U.S., denominated debt. This situation namely arises in China for its property development businesses, which seem to be a Potemkin village. However, most of this debt is held by state enterprises, which is ultimately China's corporate debt, and not the state held debt.
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