CHINA'S CENTRAL BANK STABILIZES GLOBAL STOCK MARKETS

Stocks opened sharply higher this morning (Dow +197 pts; SPX +1.4%). All eleven major market sectors are in the green, led by tech (+1.9%), materials & consumer discretionary (+1.7%), and communications services (+1.5%). In fact, the SPX has now recovered 50% of its recent decline. The VIX Index collapsed back to 17.6 as jittery traders breath a sigh of relief. Near-term, it looks like Monday’s SPX correction low was successfully re-tested yesterday. But make no mistake, we’re not out of the woods when it comes to volatility. Remember, President Trump’s new round of trade tariffs is scheduled to take effect at the beginning of September. For the moment, however, everything looks rosy. European markets closed up by more than 1%, and Asian markets are also up overnight. Commodities are rebounding today, paced by a sharp recovery in oil prices. WTI crude is up 3% to trade around $52.60/barrel. The bond market about-faced as well. Junk bonds, which sold off by 2% early this month, are now recovering. Treasuries and high-grade corporates, however, are selling off after a monster run. The 10-year Treasury Note yield, which collapsed from 2% to 1.71% in a matter of a few days, ticked up to 1.75%.

Traders bid up stocks around the world today because China’s central bank announced a stronger than expected daily currency exchange rate. China fixes its Yuan to the US dollar, or more specifically, lets the Yuan fluctuate within a fairly tight range to the dollar. Today, the PBOC set the midpoint of the range at 7.0038 per dollar. According to Bloomberg, global currency traders were expecting something closer to 7.015. It may not sound like much, but remember, capital markets hate currency volatility. China’s surprise Yuan devaluation on Monday put investors and traders on notice that China is willing to use its currency as a weapon in the trade war. So today’s Yuan fixing is clearly meant to calm capital markets.

According to bankrate.com, the average 30-year fixed mortgage rate has fallen to 3.81%. That’s a far cry from 4.45% a year ago. Rates throughout the economy have fallen, both due to the Federal Reserve’s rate cut, and also because rates all around the world are down due to slower economic growth. Couple that with an amazingly low 3.7% unemployment rate, and you’re beginning to see reacceleration in the housing market. Mortgage applications were up 5% last week. And NAHB’s homebuilder sentiment index is trending very positively.


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