Markets fell after rethinking Chinese currency announcement

Markets gave up early gains after realizing the flexibility in exchange rates announced by China were not going to make a significant difference in trading habits. Dow fell 8, decliners over advancers 4-3 & NAZ declined a bigger 20. Lower bank stocks gave the Financial Index a modest decline.


S&P 500 FINANCIALS INDEX

Value	199.30
Change	-0.54 (-0.3%)

Gains for high yielders were trimmed in late day trading. The Alerian MLP Index was up a fraction in the 304s while the REIT index slumped 1½ to the 204s. Junk bond funds were flat to lower. The VIX rose 1+ to the 25s, little changed from where it was for much of last week. The yield on the 10-year Treasury bond gained only 2 basis points to 3.24%.

Alerian MLP Index --- YTD




Dow Jones REIT Index --- YTD





Like the stock market oil lost early AM momentum, but remained higher in its pursuit of 80. Gold prices advanced for a month & could remain in record territory on continued momentum. But gold's safe-haven appeal diminished when China announced that it will take steps to end the yuan's 2-year peg to the dollar & allow the Chinese currency to trade more freely. China will increase its exchange rate's "flexibility." That optimistic sentiment gave a boost to investor confidence & reduced some demand for the safety of gold.

CLN10.NYM

..Crude Oil Jul 10

..77.63

.. 0.45 ......(0.6%)

GCM10.CMX

..Gold Jun 10

..1,236.70

.. 20.50 ......(1.6%)

Gold Super Cycle!!
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BP (BP) diverted 23K barrels of oil from its well to ships on the surface yesterday, an 11% increase from June 19, when part of the operation was shut down. But oil is still flowing from the well at a rate of 35-60K barrels a day, according to an estimate by a gov scientific team. Total costs of the spill response, including collection, cleanup & relief wells to permanently plug the leak have risen to $2B. BP fell 1½, hanging in just above 30.

BP's Oil Recovery Rate in Gulf Increased 11 Percent


BP --- YTD





Upon reflection, traders realized that changes announced by China were not that meaningful. Quibbling about the yuan's exchange rate at 6.8 or 6.9 to the dollar & tiny refinements to those numbers is not going to make a big difference in trading patterns with China. Big picture, it remains the elephant in the room. Its large holdings of US Treasuries make reevaluation of the currency more difficult. Strengthening the currency reduces the values of its holdings, something the US doesn't care about but they do. The month & qtr are closing, which will influence trading into next week.


Dow Jones Industrials --- YTD

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Chinese easing currency policy boosts markets

Stocks are strong. Dow is up 98 (but 50 below earlier highs), advancers ahead of decliners 3-1 & NAZ gained 14. Banks are leading the advance taking the Financial Index over 200 (something it has done many times in the last 10 months).


S&P 500 FINANCIALS INDEX

Value	201.85
Change	2.01 (1.0%)

High yielders are having a good day. The Alerian MLP Index rose 2½, a high since early May. The REIT index jumped 3½, a 5 week high. Junk bond funds were up around 1%. But the VIX, volatility index, was flat at 24. Treasuries were weak, the yield on the 10-year Treasury bond rose 5 basis points to 3.28%, but still in low territory.

Alerian MLP Index --- 2 weeks




Dow Jones REIT Index --- 2 weeks




VIX --- 2 months





Bullish sentiments from the stock market are bleeding over to commodities, like oil. Oil is heading for 80, the high end of its range since its fall from record levels more than a year ago. Gold buyers are not sure what to make of moves in the Chinese currency, so they're sitting tight. The chart below shows gold rose this year TO RECORD LEVELS, something few stocks can say!

CLN10.NYM

...Crude Oil Jul 10

...78.76

... 1.58 .......(2.1%)

GCM10.CMX

...Gold Jun 10

...1,255.50

... 1.70 .......(0.1%)

Gold Super Cycle! Click Here

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GLD (ETF) --- YTD






China's holdings of Treasuries - 1 year




Graph: Bloomberg


China followed through on its pledge to allow greater flexibility in exchange rates, but added that an appreciation in its currency alone could not rebalance world growth. It urged world leaders to carry out more fundamental reforms. The yuan is trading at about 6.8012 to the $1, strengthening from 6.8272 on Fri. For the past 2 years, China has kept the yuan trading in a much narrower band around 6.83 to $1. The move was mainly aimed at countering criticism of China's currency policies ahead of this weekend's summit of the Group of 20 leading economies & would not result in any significant shifts in exchange rates. The yuan is still subject to a 0.5% daily trading range, limiting potential volatility. China will revert to relying on a basket of currencies that includes the US dollar to determine the exchange rate, rather than the dollar alone, allowing it to return to policies in force before the global financial crisis walloped Chinese manufacturers in 2008, putting millions of workers out of jobs. China is very important to global trade & has increased its holdings of US Treasuries in Mar-Apr to over $900B (complicating discussing trade issues with them)! Some lawmakers pressuring China to make changes in its exchange rates are viewing this as not bringing fundamental changes to the imbalance with their currency.

Yuan Strengthens Most Since 2005 After China Signals End to Peg

China Backs Obama as Treasury Holdings Rise to $900 Billion

As oil continues to gush into the Gulf of Mexico, nations around the globe are taking a cue from this cautionary tale & ratcheting up their oversight of the petroleum industry. The EU, Canada, China, France & Bulgaria (among others) are reexamning offshore drilling rigs. The scrutiny reflects growing unease about oil companies seeking to drill farther out to sea & deeper than ever before. The process is expensive, risky & largely uncharted, highlighted by BP's use of untested methods to try to stem the Gulf spill. Pipelines can be affected. Bulgaria canceled a new pipeline to carry Russian oil to Greece following resistance from residents of the Black Sea town of Burgas, where the pipeline was to start.

• Nations rethink drilling in wake of BP oil spill- AP

Bulls liked the Chinese announcement about their currency, but not that much has changed. Their currency is not allowed to fluctuate very much & that won't change. This impact on trade with other countries will probably be limited. The € is flattish, just under $1.24. Meanwhile the Gulf mess drags on & unemployment in the US is not getting better. Markets may lose more strength in the PM.

Dow Jones Industrials --- 2 weeks

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