Yuan fixing sends a message
PBOC changed its daily yuan reference rate more than expected overnight to stabilize the market. China is actively using the currency to offset headwinds from additional US tariffs. It shows China’s determination to continue to fight the US in this prolonged trade war that continues to throw volatility into markets. The weaker Chinese currency is hitting emerging market equities the most as Chinese equities are the biggest component (32.2%) in the benchmark index. Emerging market equities are down 7% in Q3 compared to 3.5% for developed equities.
Chinese equities naturally rallied on the weaker currency as it lifts growth prospects at the margin. For local investors the weaker currency creates short-term momentum for foreign investors it’s not a delightful development and Chinese equities in USD terms have also struggled since the peak in April.
KOSPI 200 is still in bear market
The leading equity index in South Korea, KOSPI 200, is still in a bear market down 26% from the peak in early 2018. Contrary to the MSCI World Index, KOSPI 200 is down for the year and has lost a staggering 8% in local currency the past month indicating no relief in the global economy.