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

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