Stocks gapped down at the open after China surprised the world by devaluing its currency (see below). The Dow is currently down 596 pts and the SPX is down 2.3%. Not surprisingly, cyclical sectors like consumer discretionary, tech and financials are down the most. Stocks more exposed to China are getting hurt (i.e. Apple Inc. down 4%). Utilities is the best performing sector, essentially flat. Gold is up 1% in early trading and gold mining stocks are up more than that. Other commodities, however, are in the red. WTI crude oil is down 1% to trade around $55/barrel. Copper and iron ore are down nearly 1%. The bond market is trading mostly higher—save junk bonds. Treasury bond yields are down across the board as investors all around the world shift to the ultimate safe-haven asset. The 10-year Treasury yield gapped down to 1.77%, the lowest since mid-October 2016.

In retaliation for President Trump’s recent threat to place a 10% tariff on all remaining Chinese imports not already taxed, China unexpectedly devalued its currency to a level not seen in more than a decade. Of course, some weakness in the Yuan should be expected as a result of slowing economic growth. Since the beginning of the trade war in the spring of 2018, China’s economic growth has slowed from 6.8% to 6.2%. But make no mistake, large, sudden moves like this one are a clear signal that China will fight back against the Trump Administration’s import tariffs. The move isn’t unprecedented. China last roiled markets with a large-scale currency manipulation back in 2015. The reason is simple: manipulating the Yuan lower is a big help to Chinese firms exporting goods overseas. It makes Chinese goods relatively cheaper in foreign markets, thereby offsetting some of the impact of higher tariffs. This wasn’t the only retaliatory move, however. The government also orders state-owned firms to stop importing US agricultural products. So it’s clear that the two sides are moving farther apart on trade.

ISM’s non-manufacturing business activity index fell to 53.7 last month from 55.1 in June. That’s the lowest level since August 2016. The services sector is critical because it accounts for about two-thirds of the US economy. Any ISM reading above 50.0 signals continued expansion, so 53.7 is certainly not dire. But it’s clear that business activity is less robust than it was a year ago. In addition, last week ISM said its manufacturing index fell to 51.2 in July, and the volume of new orders to manufacturers declined. The main reason cited for deterioration in business activity is the trade war.

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