Week Ahead: China’s Yuan Statement Rallies Risk Assets
Mon, Jun 21, 12:51 PM ET, by Scott V. Nystrom
Global equity markets surge on news that China will let its currency float gradually over time. The dollar slips as investor appetite for risk rises. Market Preview The risk trade is back in favor after China’s announcement that it plans to gradually let the yuan float against the U.S. dollar. Global risk assets (stocks and commodities) jumped higher on Monday after the central bank news out of China. In overseas equity markets this morning, Hong Kong's Hang Seng index rose 3.1 percent. Japan's Nikkei 225 jumped 2.4 percent and China's Shanghai Shenzen surged 3.1 percent. The German DAX is higher by 1.4 percent mid-day. Britain's Footsie 100 is also up by 1 percent. U.S. S&P 500 index futures were trading higher by 1.5 percent in Monday's pre-market action. Crude oil prices rose to the highest level in six weeks after China announced it will increase flexibility in its currency. Oil is up over 1.5 percent this morning and hovering around $78.50 a barrel. Spot gold is trading higher by 0.4 percent, near its all-time high just above $1,262 an ounce. The euro is trading at 1.239 after rebounding against the dollar earlier this morning. The single currency had traded as low as 1.237 today. This price action is all on the heels of the euro's best weekly advance in nine months against the greenback last week. China Loosens Currency Peg On Saturday, China’s central bank announced plans to enhance the flexibility of its exchange rate. China ruled out a one-time revaluation and indicated any strengthening of the yuan would be gradual. The U.S. government has pressured China to let its currency move more freely against the dollar. An appreciation of the yuan is expected to translate into lower inflation risk and greater purchasing power for Chinese consumers while increasing inflation risk and lowering purchasing power for U.S. consumers. Lower inflation in China would take the pressure off the People Bank of China (China’s central bank) to raise interest rates in an attempt to cool off the its high growth economy. Mining stocks are expected to benefit from this move as it reduces the pressure for continued monetary and fiscal policy tightness in China. Mining stocks surged in London this morning with Xstrata higher by 4.8 percent and BHP Billiton (BHP) jumping 4.3 percent. Economic Preview On the economy, existing home sales for May will come out on Tuesday with observers expecting an annualized rate of just over 6 million in sales forecast for the month, a five percent rise from the 5.77 million sales rate reported for April. New home sales will be released on Wednesday with an annual rate of 400,000 forecast for May, a 20 percent decline from the 504,000 rate for the previous month. Also on Wednesday, the two-day meeting of the Federal Open Market Committee (FOMC) ends and releases a statement. The Fed will again likely leave short-term interest rates unchanged at nearly zero percent. Language in the statement is once again expected to say that rates will stay “exceptionally low” for an “extended period.” The FOMC will also likely maintain that expansion in the economy continues with few signs of inflationary pressure. is However, the statement could mention potential risks to the U.S. economy, particularly from a European sovereign debt and banking crisis. On Thursday, initial jobless claims will be released with expectations for 465,000 new unemployment claims for the week of June 19th. Economists will be watching this week's number carefully after the Labor Department reported higher than expected jobless claims last week. Also on Thursday, all eyes will be on the durable goods orders announcement. Orders for durable goods are forecast to be weak, with economists forecasting a 0.5 percent decline for May after rising 2.9 percent in April. Earnings Preview On the earnings front, Adobe Systems (ADBE) will report on Tuesday. Analysts are expecting first quarter profits of 42 cents per share. Oracle (ORCL) will post profits on Thursday, with Wall Street expecting 55 cents per share. Also on Thursday, the Blackberry company, Research in Motion (RIMM) is expected to report $1.33 per share in earnings. KB Homes (KBH) will post earnings on Friday with analysts expecting a loss of 30 cents per share.
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