It’s been all about China this week.
Specifically, the People’s Bank of China’s move to devalue the yuan, which has now declined 3% against the US dollar, against which it remains pegged.
This move has led to a lot of hand-wringing about “what it means.” Some have argued that China has just launched the world into a new currency war, while others have argued that this move isn’t really a big deal.
In a note to clients on Friday, Peter Tchir at Brean Capital joins the former camp, but not so much because of China’s move itself, but because of what it does to the broader situation in global markets.
Tchir writes that with this move China has, “added a new, large and unexpected variable to the global economic and markets.”
Evoking the famous Donald Rumsfeld quote about “known unknowns,” Tchir adds that the PBOC’s move is known, while the side effects are unknown, writing: “We definitively KNOW that China has embarked on an aggressive policy of devaluation… what is UNKNOWN, at least to me, is the ultimate impact of this and what it reveals.”
And so any way you hack up, this move and its implications add more variable to markets that are a, “complex system that is likely to have unintended and unexpected consequences that are far from obvious.”
In a note earlier this week, Tchir’s colleague at Brean Capital, Russ Certo, also wrote about the “complex linkages” that have appeared in markets of late particularly as it relates to the big price swings we’ve seen in commodities.
On Friday, oil prices were little changed near a 6-year low, stocks in the US were doing nothing, and the market as a whole in some sense seems to have moved on from the news of just a few days ago out of China.
But that’s all we know.