U.S. stocks climbed Tuesday, recovering some of Monday’s losses after China’s central bank fixed its yuan at a stronger-than-expected level.
Here were the main moves in the market by the end of regular trading:
S&P 500 (^GSPC): +1.3%, or 37.09 points
Dow (^DJI): +1.22%, or 312.93 points
Nasdaq (^IXIC): +1.39%, or 107.23 points
10-year Treasury yield (^TNX): -2 bps to 1.716%
U.S. dollar index (DX-Y.NYB): +0.12% to 97.64
U.S. dollar to onshore Chinese yuan rate ( CNY=X): -0.334% to 7.0222
On Tuesday, People’s Bank of China (PBOC) set the yuan fixing at 6.9683 against the U.S., a stronger rate than had been expected by consensus economists. However, given that the PBOC allows the yuan to move 2% in either direction from its daily midpoint fixing, the currency could continue to hold past the 7-per-dollar rate and be within range.
Stocks on Monday posted their single worst session of 2019, after China allowed the yuan to weaken past the closely watched 7-per-dollar rate for the first time in more than a decade. Allowing the yuan to fall – and thereby making Chinese exports cheaper and more attractive to global buyers compared to U.S. exports – was widely viewed as retaliation for the Trump administration’s newly announced tariffs on hundreds of billions of dollars worth of Chinese goods.
The precipitous drop in the yuan led the U.S. Treasury Department to formally label China a currency manipulator late Monday, marking the first time since 1994 that such a designation was applied. As recently as earlier this year, the U.S. had merely placed China on a watch list for potential unfair currency devaluation, along with eight other nations.
The label is mostly symbolic, and also includes that the U.S. go to the International Monetary Fund to request that it closely monitor China’s currency practices. However, the IMF is “unlikely to be entirely supportive of the U.S. position – on their estimates, the renminbi’s level is broadly in line with fundamentals,” Capital Economics economist Julian Evans-Pritchard wrote in a note.
To offset the forthcoming 10% tariff the U.S. plans to impose on $300 billion worth of Chinese goods, the USD-CNY exchange rate would need to be in a range of 7.1 to 7.2, Credit Suisse economist Alexander Redman estimated.
But the designation also represents yet another escalation of tensions with China, especially after the PBOC insisted in a statement Monday that the weakening yuan was “determined by the market” and was not “a tool to deal with external disturbances such as trade disputes.”
The rising tensions led at least one major firm to reconsider its expectations for a near-term trade deal with China, with Goldman Sachs economists saying they no longer expected a deal within the next year.
“We had expected a final round of tariffs targeting remaining Chinese imports at a 10% rate. But news since President Trump’s tariff announcement last Thursday indicates that U.S. and Chinese policymakers are taking a harder line, and we no longer expect a trade deal before the 2020 election,” Goldman Sachs economists led by Jan Hatzius wrote in a note Tuesday.
The economists added that they expect the Fed to ease the benchmark interest rate by a total of 75 bps this year – comprising a 25 bps cut in each of September and October, on top of August’s cut – “in light of growing trade policy risks, market expectations for much deeper rate cuts, and an increase in global risk related to the possibility of a no-deal Brexit.”
Another result of the Treasury Department’s designation of China as a currency manipulator is that it diminishes the likelihood of near-term intervention with the U.S. dollar, Nomura analyst Craig Chan said in a note Tuesday. Trump has previously floated the notion of weakening the U.S. dollar as a move to achieve parity with other countries for alleged unfair currency practices.
“Near-term U.S. FX actions would be even more contentious, given it could be viewed as hypocritical after labeling China a currency manipulator,” Chan said. “But it remains a risk as it could be pursued by President Trump.”
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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