Pro Perspectives 8/6/19

August 6, 2019

In my note yesterday, we talked about the two big charts to watch overnight:  1) the yuan, and 2) U.S. stocks.

We closed yesterday with stocks hovering a little more than one percent away from big technical support (the 200-day moving average) in the S&P futures.  A test and hold of that line would give us about an 8% correction in seven days

That big support level (the purple line) did indeed test overnight, and we had a huge bounce as you can see in the chart below …

The test of the 200-day moving average came early Monday evening, after news hit the wires that the U.S. had officially labeled China a currency manipulator

So what did China do with the yuan last night? 

The risk heading into the night was that they would continue the devaluation (maybe something much bigger).  Instead, they eased the tension, moving the yuan back below 7.  And PBOC officials were out reassuring companies the currency would be stable. 

That was fuel for stocks today.  From the lows overnight, S&P 500 futures rose almost 4% by the New York close.  But it was far from "risk on."  Gold continues to make new highs.  And treasury yields continued to make new lows (closing closer to the lows of the days on the 10-year).  

Now, the consensus opinion going around today, on this step to label China a currency manipulator, is that it's futile/ ineffective. 

What does it do?  It draws global trading partners into the fray, via the IMF and WTO membership.  The WTO will be forced to make a judgement on China.  That ups the stakes for China, with the prospect of being put into the global penalty box. 
Here’s an excerpt from a Congressional Research Service white paper, Currency Manipulation: The IMF and WTO…
"Unique among the major international trade and finance organizations, the WTO has a mechanism for enforcing its rules. If a country believes another country has violated WTO rules, to its detriment, it may request the appointment of a dispute settlement panel to hear its complaint. The other country cannot veto the establishment of a panel or adoption of a WTO decision by WTO members. The panel reviews the arguments in the case and renders judgment based on the facts and WTO rules. If the losing party does not comply with the ruling within a reasonable period of time, the WTO may, if requested by the complaining party, authorize it to impose retaliatory measures (usually increased customs duties) against the offending country or to take other appropriate retaliatory measures against that country’s trade." 

Can the U.S. withdraw this claim?  It appears so, rather easily. Which could be a bargaining chip to get back to the negotiating table.

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