Market forces usually would act to drive down the yuan in response to USA actions against Chinese goods, but China's central bank previously has been allowing the currency to hold its value so as not to further inflame trade tensions. The US started it and escalated things with their latest announcement of imposing further tariffs on Chinese imports and the Chinese retaliated by the banning of state imports of US agricultural products. "This is a major violation which will greatly weaken China over time!".
Losses were steep and worldwide as the sell-off that began Monday in Asia swept westward through Europe to the Americas.
Asian markets all fell more than 1.6% Monday, and Hong Kong's Hang Seng closed down 2.9% as protests continue in the region.
The yield on the 10-year Treasury note, which rises with expectations of stronger economic growth and inflation, fell to its lowest level since Trump's 2016 election energized markets, down to 1.73% from 1.85% late Friday. Caterpillar and Boeing, which both rely heavily on business in China, saw their shares off more than 2 percent on renewed trade tensions.
Trump expects to win the trade war because he thinks that it does more economic damage to China than to the US, which means China will eventually have to cave to his demands. Futures also were down in the U.S. The S&P 500 was down 1.6%, the Dow Jones Industrial was down 1.4% and the Nasdaq was down 2.1% about a half-hour before the opening bell on Monday.
"This is the formal introduction of currencies into the trade war", said Richard Benson, head of portfolio investments at foreign exchange asset manager Millennium Global. The biggest threat coming out of the past week, he said, is that all the uncertainty about trade will scare CEOs and shoppers away from spending.
Trump's tariff hikes have put downward pressure on the yuan by fueling fears economic growth might weaken.
"Given that their goal is presumably to offset some of the impact from additional USA tariffs, they are likely to allow the currency to weak further, probably by 5% - 10% over the coming quarters", Evans-Pritchard wrote. That hurts USA manufacturers, which have already been hit by the slowing global economy.
Today China fired back by devaluing their currency to more than 7 yuan to the dollar.
The harder line underlines a growing feeling in Beijing that Trump can't be trusted to cut a deal, and that China would be better off waiting to see if a Democratic presidential candidate - many of whom have criticized the use of tariffs - takes office.
If the US goes through with threatened tariffs on September 1, it will tax essentially everything imported from China.
Monday's plunge in bond yields dragged on banks by making lending less profitable.
The central bank set the yuan's daily midpoint CNY=PBOC at 6.9225 per dollar before the market open, its weakest level since December 3, 2018. Gold prices jumped by more than one percent to hit their highest level in more than six years today, while the Japanese yen and core government bonds also increased. Profit for companies in the S&P 500 is now expected to contract by roughly 1%.
The CBOE Volatility index, a gauge of investor anxiety, rose to its highest level in about three months at 21.71 points. India's Sensex lost 1.7% to 36,491.55. Crude oil fell as a weaker global economy would mean less demand for energy. Brent crude, used to price worldwide oils, shed 72 cents to $61.17 in London. France's CAC-40 declined 2.1% to 5,243.
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