volume664.html

In a very volatile week at one point, the DOW was down over 700 points. Investors were scared of US-China trade issues getting worse which is increasing the chances of global recession.  For details read below. The DOW closed up +28 points or +0.11%, the S&P500 was up +21 points or +0.71%, and the NASDAQ was up +136 points or +1.74 for the week ending August 9th. Oil was down -$0.92 or -1.7% to $54.27 per barrel.

• President Trump tweeted to add a 10% tariff on an additional $300B of trade from China to the US effective September 1, 2019

• China reacted by deciding not to buy US agriculture products which hurt the US farmers. President Trump has been trying to protect the US farmers from the trade fight.

• In addition, many experts saw the sudden weakening of the Yuan (Chinese currency) against the USD. The previous week $1 was = 6.96 Yuan, and this week $1 = 7.04 Yuan.  When currency weakens the export gets cheaper to buy and help the local businesses. The US saw it as a Currency Manipulation by China and called it the Currency Manipulator – a bad label to attach to a country!  For details read below.

What is Currency Manipulation?  When a country tries to benefit its local businesses against foreign businesses by influencing the exchange rate is considered Currency Manipulation. Typically, Currency Manipulator buys or sells foreign currency with its local currency to manipulate the exchange rate.

For example, US trade tariffs on China make Chinese Goods and Services more expensive to buy in the US.  So, to make Chinese businesses remain competitive, China buys more USD using the Yuan which makes the USD value rise and the Yuan devalue. Think more the USD demand and less Yuan supply, raises the exchange rate from $1 : 6.96 Yuan to $1 : 7.04 Yuan, thus making Chinese goods cheaper to buy with a strong dollar against an artificially weak Yuan.

Typically, China buys US Treasury Bonds as a safe place to protect its excessive foreign reserves of ~$3T which have built up over time due to net export surplus toward the US. As a normal practice, China does let Yuan float within the +/-2% range of the rate, however, many experts have considered Yuan going above 7 against USD as a sign that China is now doing more than it normally does to manipulate the exchange rate.  Read green-red-blue boxes for a simplified explanation.

Can China continue to manipulate the currency? It is not that simple…

• • • China holds over 5% of US total debt in the form of US Treasury bond – US total debt is over $22T and growing. This debt is funded by many countries who are happy to lend money to the US as they consider the US to be a reliable economy and payback is risk-free.  China holds over $1.1T or ~5% of US total debt.  Japan is another country with similar loan amounts.  China needs to protect the value of such large loans. To send a message to the US China could ask for its loan payback, which will cause the USD interest rates to rise making the loan value worth less.  
  • • Rich people in China will take their money elsewhere – When China devalues its Yuan, the USD costs more than before so for rich Chinese take their money out of China, which reduces foreign currency reserves. China wants foreign exchange to grow its economy.
  • • China has a large foreign currency reserve to protect –   Many countries consider the US Treasury as safe haven to park their excess USD funds which they have due to net export to the US.Think US buys and pays in USD to these selling countries, which helps the selling countries accumulate USD as foreign reserves. This reserve needs to be protected from any financial risk. So, these countries invest in US treasury bonds to keep it safe. China has over $3.1T of foreign reserves which it cannot afford to risk, so it parks these reserves by buying US treasury bonds which are considered to be safe. 
  • • The US has ways to outrun any country in the world, including China – The US is an open and competitive economy that is heavily relied upon by others. USD is considered a standard for global trade.  So any games by China to negatively impact the US offers many ways for US to counter it. For example, if China offloads USD to send a message to the US, then the excess supply of USD in the market will lower the exchange rates which will make the Chinese products cost more. In addition, the US could also do Quantitative Easing, click here — What is Quantitative Easing (Q.E)? Volume 343, to increase its USD supply causing inflation to increase which in turn will make Chinese loans to the US worth less, a good thing for the US and bad for China!

______________________________

Year-To-Date (YTD) the DOW is up +12.7%, the S&P500 is up +16.4% and the NASDAQ is up +20.0%

In 2018 the DOW was down -6.7%,  the S&P500 down -7.0% and the NASDAQ down -4.6%.  In 2017 the DOW was up 25.1%, S&P500 up 19.4% and NASDAQ up 28.2%