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China Arrests Yuan's Plunge. Will Markets Gain?

Zacks Equity Research

U.S. stock index futures rebounded strongly ahead of trading on Tuesday after Chinese authorities acted to arrest the yuan’s decline. The country’s central bank hinted that it wanted the yuan to trade stronger versus the dollar by fixing its reference rate higher than the psychological level of 7.

This represents a significant recovery from the losses suffered in after-hours trading on Monday. The U.S. Treasury Department had called China a currency manipulator for the first time in nearly 25 years, accelerating the reverses suffered earlier in the day. Markets have remained on tenterhooks ever since President Trump decided to impose fresh tariffs on an additional $300 billion of Chinese imports.

Among notable earnings released before the market opens are surgical systems company Becton, Dickinson BDX and utilities provider Duke Energy DUK. Both companies exceeded earnings and revenue expectations. Meanwhile, Disney DIS is expected to release third-quarter earnings figures after the market close. 

Benchmarks fell to their lowest levels for the year on Monday. The rout was triggered by China’s decision to allow the yuan to plunge to a historic low. Further, service activity in the United States slowed to its lowest level in the past three years. The three major benchmarks ended in negative territory.

The Dow Jones Industrial Average decreased 2.9%, to close at 25,717.74. The S&P 500 decreased 3% to close at 2,844.74. The tech-laden Nasdaq Composite Index closed at 7,726.04, losing 3.5%. The fear-gauge CBOE Volatility Index (VIX) increased 23.6% to close at 21.79. Decliners outnumbered advancers on the NYSE by a 7.17-to-1 ratio. On Nasdaq, a 7.42-to-1 ratio favored declining issues.

The Dow dipped 767.3 points to close in the red due to broad-based losses. At its session lows, the Dow had dropped by as much as 961.6 points. Shares of Boeing BA and Caterpillar CAT lost 2.5% and 2.3%, respectively and weighed on the 30-stock index. This marked the Dow’s fifth straight session in red.

The S&P 500 dropped 87.3 points to end in negative territory for the sixth session on the trot. All of the S&P 500’s 11 major sectors ended in the red, with technology stocks leading the decliners. The Technology Select Sector SPDR Fund (XLK) decreased 4.1% on Monday.

Meanwhile, the Nasdaq slid 278 points to also close in the red. This marked the tech-heavy index’s sixth consecutive close in the negative territory. Shares of Apple AAPL declined 5.2% and weighed down the Nasdaq. The stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

After vowing to retaliate firmly to President Trump’s abrupt announcement to impose 10% tariff on $300 billion worth of Chinese goods, China allowed its currency to decline to a more than 10-year low. The yuan broke above 7 for every U.S. dollar, trading around 7.05. This happened for the first time since 2008 and rattled the stock markets.

Following this, Trump accused China of manipulating its currency. He tweeted: “It’s called ‘currency manipulation.’ Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!” Moreover, this was the first time since 1994 that a country was called a currency manipulator.

Meanwhile, the People’s Bank of China (PBOC) denied such allegations and issued an official statement clarifying its stance on the issue. PBOC Governor Yi Gang stated that his country will “not use the exchange rate as a tool to deal with external disturbances such as trade disputes.”

On the economic data front, the Institute of Supply Management (ISM) reported that its services index fell to its lowest level since August 2016. The metric slowed to 53.7% in July, below June’s reading of 55.1%.

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Duke Energy Corporation (DUK) : Free Stock Analysis Report
The Walt Disney Company (DIS) : Free Stock Analysis Report
The Boeing Company (BA) : Free Stock Analysis Report
Apple Inc. (AAPL) : Free Stock Analysis Report
Caterpillar Inc. (CAT) : Free Stock Analysis Report
Becton, Dickinson and Company (BDX) : Free Stock Analysis Report
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