China is shaking up global markets.
For two straight days, the People’s Bank of China has moved the official exchange rate and weakened its currency by 1.9% in a bid to boost its economy.
US stocks sold off on Tuesday, and on Wednesday, the major averages had their biggest drop in three weeks. The Dow fell to its lowest level of the year, and the S&P 500 went negative for 2015.
Asian and European stocks were also a leg lower.
In a note to clients on Wednesday, Gluskin Sheff’s David Rosenberg highlighted five reasons why the surprising move from China is sending jitters to investors:
- Still remember Greece? Now, China is added to the list of global worries, and it’s not likely to be deleted soon. Rosenberg notes that the real effective yuan excluding the dollar is up 14% for the year. And so, we may have only seen the beginning of the central bank’s devaluations.
- Weakening a currency helps exports become cheaper and more competitive. And so, countries with big trade linkages just lost a big one to China.
- Other Asian central banks may soon join in and escalate this “currency war.”
- China may be accepting that the “‘hard landing’ risks” are worse than previously thought, and the government may not even know the extent of the economy’s weakness.
- The US dollar will continue to climb on all of the above. That’s bad for commodities, and for emerging market countries that have piles of debt denominated in the dollar.
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