Yuan Devaluation Surprises Market

August 17, 2015

Yuan Devaluation Surprises Market Photo

Last week's surprise announcement from the Chinese government devaluing the Yuan affected markets across the globe. Emerging market currencies experienced the biggest impact, with a significant weakness not seen for many years. The devaluation has also further dampened the sentiment in the commodity markets, where energy and metal prices continue to decline. This trend will most likely continue for the next several weeks.

Over the last few weeks, in addition to weak commodity prices, equity markets have been soft, investment grade and high yield credit spreads have widened, and U.S. Government bond yields have bullishly flattened. I expect these conditions to continue for the next several weeks. I think it will lead to some compelling opportunities to go against this trend ahead of the anticipated September Fed tightening. I look to short rates at below 2% on the 10-year Treasury, expecting a selloff to approximately 2.5%. I think the old trading adage of "buy on anticipation, sell the news" will work well in this market. If the Fed doesn't tighten in September, these trades may have even more upside.

This week is also a big week for everyone who participates in fantasy football, as most drafts seemed to be scheduled in the near future. I have the number two pick in one of my leagues and expect to pick DeMarco Murray……Go EAGLES! Good luck in your drafts!

Tags: Monday Morning O'Malley | Commodity prices | Yield curve | 10-Year Treasury | Energy | China | Metals & Mining | Yuan | Currency devaluation

< Go to Monday Morning O'Malley

This blog post is for informational use only. The views expressed are those of the author, Dave O’Malley, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client.  Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.

Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice.  The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete.  Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements.  Actual results may differ significantly.  Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.

Investing involves risk, including possible loss of principal.  Past performance is no guarantee of future results.  All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.

High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.

All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.

Subscribe to Our Publications