Making Sense of the China Move

(Note: Kevin Cook and Mark Vickery will be substituting for me while I am away on summer break, starting Thursday August 13th)

The China currency issue continues to drive market sentiment all over the world, with investors likely interpreting the move as indicating an even weaker state for the underlying economy than has thus far been generally understood.

The Chinese currency weakened further in the Wednesday session, on day 2 of the devaluation announcement, prompting the central bank to intervene and give the currency a lift towards the end of the local trading session. Despite the central bank support, the currency has now lost almost -4% in two days against the U.S. dollar. This was the primary driver pushing stocks lower in overnight trading in Asia and Europe and the same appears to be in store for U.S. stocks as well.

[Hear: Dr. Woody Brock: What Lies Ahead for China?]

The concerning part of this issue, from the perspective of market participants is two-fold – the prospect of a race-to-the-bottom type of currency war and the realization that the currency move is only reflecting the slowdown in the underlying economy. I don’t subscribe to the currency-war narrative, but it nevertheless poses contagion risks for the country’s trading partners, particularly in the emerging world. But the economic slowdown issue is getting greater play as the currency move could be interpreted to mean that the economic situation may actually be even weaker than many already believe. This narrative would put the currency move squarely as a response to give a nudge to the country’s floundering export sector, which has fast been losing ground as we saw in last weekend’s trade numbers. This morning’s weak earnings report from China’s Alibaba (BABA) further spotlights this issue.

Alibaba isn’t the only retailer that came short of expectations in its earnings report this morning, Macy’s (M) missed badly and guided lower on top of that. Including this morning’s Macy’s and others reports, we have seen Q2 results from 23 retailers in the S&P 500 index (out of the 43 total) that combined account for 57.5% of the sector’s total market cap in the index. For the S&P 500 index as a whole, the earnings season is winding down, with reports now out for 455 index members. Total earnings for these 23 retails are up +6.6% from the same period last year, on +11.9% higher revenues, with 69.6% beating EPS estimates and 43.5% coming ahead of top-line expectations. This is modestly better performance than we have seen from the same group of retailers in other recent periods, while the performance comparison to other sectors being notably favorable.

About the Author

randomness