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China Fever, Oil Swoon, Gold Finds Traction, Equities Upset

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Whom Fortune wishes to destroy she first makes mad.

No doubt everyone one is familiar with today’s yuan devaluation by China, the one big inescapable driver in all markets – except in Shanghai equities.

The move has been described as everything from a strategic chess move to a sign of weakness, from a slow-moving train wreck to the makings of apolitical revolution. Some commentators went even further.

"I think it's screaming that China is in trouble. The Chinese leadership is really starting to run scared," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management, referring to a crackdown on corruption in the world’s second largest economy that has paralyzed bureaucrats fearful of having the central committee point fingers at them.

Regardless of how we describe it verbally, we can quantify the effects of the devaluation, not because the devaluation itself is important but because it indeed signals China’s soft growth and spotlights the deceit behind much of the data that flows from the country.

Although in general gold has found a new life recently, certainly the currency move in China helped it along. Gold is up a modest one-third of a point in late afternoon trading.

West Texas Intermediate crude is down over 4% today, plunging toward the $43 per barrel support level that, if broken, could lead the American benchmark into the 30s. WTI is at a six-year low. Brent North Sea is now firmly entrenched at roughly the $49 per barrel level.

Asia’s equities markets were down modestly on the yuan fiasco, the Nikkei faring worst. The DAX was hurt the most in Europe – and the world – reflecting German exposure to Chinese financial instruments.

The Dow is down 1.25% as of 3:30 in New York, but has come off its highs for the day. Much of the Dow tumble though is related to the energy volatility. On the NASDAQ, Apple fell over 4% on the China de-val, analysts expressing concern for Apple’s exposure in the Chinese market, which translates to worry that the purchase of iPhones in that country will tank.

All currencies that have strong ties to the yuan, meaning most of east and especially Southeast Asia, took hits today. Even the strong yen – the Swiss franc of the east – fell against the dollar. On the other hand, the dollar softened a little more against the euro.

For our purposes, the devaluation of the Chinese currency means the Federal Reserve must weigh one more factor as it continues to consider when an interest-rate hike will come.

Bond traders certainly see the yuan move as pushing the date of a hike back. The yield on the 10-year slipped below the 2.15% level.

We’re not willing today to make any fundamental predictions on the longer-term influence of the yuan’s decline. We’ll wait until it trades for a few days before reconnoitering and reporting.

We will point out that, as the epigraph above says, the Chinese central planners do seem a bit crazy. Will fortune – or the gods – destroy them? The first half of the old Roman adage is in place clearly.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer