China and the yuan: The stock market declines in August, November and January were all preceded by a decline in the yuan, and by an increased spread between the official rate and the rate traded offshore (see circles in the chart below).  This indicates to us that there is capital flight from China as investors there seek to protect themselves from further weakness and offshore investors speculate that the yuan will continue to fall.  Furthermore, China is using significant reserves trying to manage the yuan’s decline, and thereby depleting China’s “piggy bank”.  This is money that could be used more productively on infrastructure spending, in our view.  We do not expect this to be resolved quickly, but we do believe that a weaker yuan should ultimately help stabilize China’s growth. 

David Fuller's view

Here is The Weekly View.

I maintain that China and the price of crude oil are the two most emotive factors in the current selloff.  Market sentiment is following these two factors slavishly.  In other words, the crowd is temporarily in a mind-set where if China and the price of oil slide simultaneously, the kneejerk reaction is to sell stocks everywhere.  Conversely, if China and oil rally, so do global stock markets. 

This cause and effect relationship is unlike to last much longer, I suspect, because people will lose interest in it and more significantly, both China’s stock market and crude oil will be so cheap that the potential for significant rebounds will be obvious.

Meanwhile, Wall Street and other leading stock markets were somewhat overvalued last year, adding to nervousness among many investors.  We are currently experiencing a lowering of valuations which should reduce investor anxiety in coming months.  In other words, a reset is occurring which should be positive for the medium to longer term.