China continues to threaten global markets

Last Friday I expected to see a more severe reaction to the removal of the circuit breakers in the Chinese market – a mechanism similar to that in the U.S., which stops stock market trading if the market falls by 7%. The Chinese government continues to intervene, both in the currency market buy selling dollar reserves and buying yuan, and by direct stock purchases to support their stock market, which has (so far) prevented (or delayed) another major drop in Chinese stocks (although Monday’s trading saw Chines stocks down more than 5% for the trading session).

The Chinese are working to control the devaluation of the yuan, to have it ratchet down in an orderly fashion, but traders know where it is headed (much lower) so it will continue to challenge the PBOC (People’s Bank of China) to control the pace of the decline in the yuan. It is widely known that the yuan is still about 10% overvalued, so we should expect to see it fall at least that amount in the near-term, with the real possibility of an overshoot as economic forces mount to drive the yuan down.

Any additional major shunts in the Chinese market or with regard to the movement of the yuan could trigger more selling in global financial markets, especially the U.S. stock market, which remains significantly overvalued.

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