China devalued the yuan again on Wednesday pushing global financial markets to new lows. Equity markets, commodity prices and emerging market currencies all came under pressure as the yuan reached four-year lows. Among the few winners this week, were holders of US and German government bonds as investors sought safety; typical safe-haven moves.

The change in Chinese policy stance is a game changer as investors have to re-think their strategy for the rest of the year.

Cheaper Chinese products

Worldwide Chinese products are now cheaper, from toys, mobiles, televisions and industrial machinery. This will boost Chinese exports while European manufacturers will find it harder to compete.

A relatively stable Yuan and European Quantitative easing have, since the start of 2015, provided a Tailwind for European exporters to China. However, the Chinese surprise currency devaluation on top of a slowing e Chinese economy has blunted European optimism.

Deflation

Until recently China, together with the United States, was seen as a potential global economic growth driver through their massive availability of financial resources. While the Chinese economy was struggling, markets believed that Chinese authorities would resort to market friendly measures to prop up domestic demand.

This week’s currency devaluation does away with this perception and signals that China is giving up on its policy shift from cheap exports to services and consumption. The implication is thus that China will not readily absorb supply from other regions leading to global deflation pressures. Global deflation would imply less demand, less growth and consequently recessionary pressures.

Global commodity prices

Deflation is already evident in commodity prices meaning more headaches for Australia and Brazil.

Commodity related assets will also come under pressure

More expensive luxury items

China has of the past few years evolved into the largest global buyer of luxury products. European luxury items, from cars to handbags and clothing were hit badly this week. Further devaluation will continue to impact this sector.

US interest rate policy

The prospect of Global devaluation, the relative strengthening of the US dollar and concerns on emerging market economic health puts the US Federal Reserve in an uncomfortable position. The much expected rate hike in September is once more in doubt.

Disclaimer: This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

 

 

 

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