So Monday’s 200+ point rise, which I called a dead-cat bounce, looks that way as equities sell off on China’s currency move.
In what’s known as “Beggar Thy Nation” currency wars, the Chinese devalued the yuan in an attempt to prop up its cratering economy.
By cheapening the currency, China hopes to jump-start its exports by reducing costs to global suppliers.
As a result of the move, trillions in derivatives have to be repriced. So a global sell off ensues as hedge funds and large institutions have to cover covenants in the risky paper.
Since the yuan was pegged to the dollar, China will now allow a wider allowance to the cheaper end of the dollar value to be the new peg price.
So, this could seem too inside baseball for most investors, but the big takeaway is that China was the growth engine for the last 7 years, pushing other economies along on that promise.
Today’s actions tell us the global growth story is a fairy tale, which means a global recession is reality.