This commentary originally appeared on Real Money Pro at 9:12 a.m. ET on Tuesday, Aug. 11. Click here to learn about this dynamic market information service for active traders.
Facing weakening economic growth and a slumping stock market, China moved overnight to devalue its currency by the steepest amount seen in the two decades since the country put its modern exchange-rate system into place.
As Jim "El Capitan" Cramer wrote early this morning in What to Make of China's Yuan Devaluation, this move will undercut several of the positives that buoyed U.S. markets yesterday:
- Commodity prices could move lower.
- U.S. export growth is threatened.
- The Chinese stock market is vulnerable.
- The U.S. dollar could strengthen.
- A September Federal Reserve rate hike could be imperiled. (Fed funds futures now give a September boost a less-than-50% probability.)
Both a devaluation and a worse-than-expected Chinese economy were two of my 15 Surprises for 2015 (in which I even prominently quoted Republican presidential candidate Donald Trump):
Surprise No. 6 -- China devalues its currency by more than 3% vs. the U.S. dollar.
"It's not like I'm anti-China. I just think it's ridiculous that we allow them to do what they're doing to this country, with the manipulation of the currency, that you write about and understand, and all of the other things that they do."
-- Donald Trump
For years, China has essentially pegged it's currency to the U.S. dollar. (liberalization meant that a narrow trading range is permitted). With the huge run in the U.S. Dollar, China's currency has appreciated compared with other Asian currencies. As a result, China has lost its manufacturing edge and its trade surplus has all but disappeared. Whether it's a permitted day-to-day weakening, changing the peg from the dollar to a basket of currencies or whether there is an overnight surprise devaluation, China's currency will weaken materially in 2015.
And check out this:
Also Ran Surprise No. 1 -- China's Real GDP growth falls below 5% in 2015 as economic growth decelerates markedly in the second half of the year.
Partially as a result of the latest currency move, I expect profit-taking today in the U.S. stock market. I would also plan on some strength in U.S. fixed-income prices (and on lower yields), as well as a flattening in the yield curve.
So, I remain short in the market.
Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.