The fallout from the yuan devaluation has been swift, essentially wiping out all the gains made by many markets on Monday. The euro gained strength as a result of the Chinese currency getting forcibly weakened. As a result, European stock markets dropped, with the DAX down almost 3 percent. The U.S. stock markets opened lower with the Dow Jones down more than 200 points.
Slicing the value of the yuan has the effect of making imported goods into China more expensive. Companies that depend on Chinese consumption will feel this pain the most. Also, Chinese-produced goods will become much cheaper prompting more purchases of Chinese goods over goods priced in more expensive currencies.
The timing of these Chinese goods flooding the U.S. market is not welcome news. Wholesale inventories rose 0.9 percent in June, when the expected amount was 0.3 percent. While some perceive this as a sign of market strength, i.e., building up inventory for upcoming sales, many zeroed in on the inventory-to-sales ratio going higher. This ratio determines how many months it will take to sell the goods at the current sales pace. That number increased from 1.29 in May to 1.30 in June, the highest it’s been since the recession.
Apparel inventories were up 2 percent from May to June. The inventory-to-sales ratio for apparel was up to 2.07 from 2.03 in May. These levels haven’t been seen this high since 1996.
Other central banks have opted to stand pat in response to the move. The Bank of Japan, which has pushed the value of its yen currency down in order to stimulate its economy, seems to be unconcerned for now, suggesting that a 2 percent move isn’t enough to change things. Goldman Sachs also suggested the move, while historically significant, was unlikely to boost growth. It is being suggested that moves between 10 to 20 percent will be needed to markedly move the needle.
Investors aren’t waiting to see if the People’s Bank of China will be making more moves, sending down the stock prices of luxury retailers on Tuesday. European retailers have seen huge numbers of Chinese shoppers taking advantage of the weak euro. They aren’t sticking around to see whether it’s a 2 percent or 20 percent devaluation that will curtail the currency shopping tourists.