Worldwide sell-off in markets on Monday as an intense boom of the trade war between China and the United States flashed. The Dow closed down 767 points, and the Nasdaq Composite — a deputation for the technology companies that will be most affected by a trade war — underwent its longest losing streak since November 2016.
The Chinese government undervalued the yuan to descent below its 7-to-1 ratio with the US dollar for the first time in year’s Monday. A devalued currency could relax the tariff shock the United States has dispensed China.
The weak yuan exploded fear on Wall Street that a currency war has started or that the United States would react with even more complex tariffs, extending the deadlock with China and hypothetically weakening the global economy. Investors are specifically anxious that the Trump administration could try to undervalue the dollar, igniting a currency war that could decline Americans’ purchasing power.
Viraj Patel wrote, “Risks of Trump intervening in foreign exchange markets have increased with China letting the yuan go”.
Risks of Trump intervening in FX markets have increased with China letting the yuan go. If this was an all out currency war – the US would hands down lose. Beijing far more advanced in playing the currency game + have bigger firepower. $JPY & gold win in an active global FX war https://t.co/4AQUBeDOai
— Viraj Patel (@VPatelFX) August 5, 2019
FX and global macro strategist at Arkera, on Twitter. “If this was an all-out currency war – the US would hands down lose. Beijing [is] far more advanced in playing the currency game [and has] bigger firepower.”
On Monday, President Donald Trump once again entitled China a currency Machiavelli saying the yuan deflation was a “major violation.” Trump has long confronted China for its currency policy, even though the Treasury has ceased from officially tagging the country a currency manipulator.
China also stated on Monday its companies have stopped purchases of American agricultural goods. That helped to drive stocks even deeper into the red.
A day for the history books
Most awful, the Dow was down 961 points Monday. Even though the index clawed back some of its losses, it recorded its worst day of the year, as well as its sixth-worst point drop in history.
The Dow (INDU) ended down 2.9%, or 767 points, dropping below 26,000 points for the first time since June. It has dropped five sessions in a row, marking the worst losing streak since March.
The benchmark S&P 500 (SPX) closed nearly 3% lower, also marking its worst day of the year. The index has declined for six days in a row for the first time since October.
The Nasdaq Composite (COMP) finished down 3.5%, its biggest failure since October 24, 2018. The Nasdaq also recorded its longest losing streak since November 2016, when it fell for nine succeeding days in the lead-up to the presidential election.
Previous week, the S&P 500 and the Nasdaq Composite logged their worst week of the year.
Hit particularly hard were tech stocks. Apple (AAPL), Intel (INTC), Microsoft (MSFT), Nvidia (NVDA)and Advanced Micro Devices (AMD) were among the biggest losers on Monday.
The VIX (VIX) volatility index ascended nearly 40% to a seven-month high. The CNN Business Fear & Greed Index is representing “Extreme Fear.”
Though Monday was a poor day for the market, investors should put the losses into perspective. The Dow is still up more than 10% this year, while the S&P is up 13.5%. The Nasdaq has posted a gain of more than 16% in 2019 even after Monday’s selloff.
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. In Europe, London’s FTSE 100 finished down 2.5%. Germany’s DAX and France’ Cac 40 closed 1.8% and 2.2% lower, respectively.
US government bonds rose and yields fell as traders looked for safe investments. Bond prices and yields move opposite to one another.
The 10-year Reserves yield dropped to 1.7244%. The yield curve — the difference between shorter and longer-term bond yields — grew the widest since April 2007. That inversion of the yield curve has predated every past recession.
Escalating the trade war
The yuan declining sharply after the People’s Bank of China set its daily reference rate for the currency at 6.9225, the lowermost rate since December. The central bank said in a statement that Monday’s weakness was mostly because of “trade protectionism and new tariffs on China.” President Donald Trump threatened a new round of tariffs on the country previous week.
Devaluing the yuan is one way China has of hit back against the tariffs. A weaker currency helps Chinese manufacturers balance the costs of higher tariffs.
Analysts at Capital Economics said the move showed that Beijing has “all but abandoned” hopes for a trade deal with the United States.
In US economic data, the non-manufacturing index for July from the Institute of Supply Management destabilize consensus prospects, which didn’t help matters.