Markets fixate on the yuan fix. The daily level at which China’s central bank fixes the yuan, a central reference point that determines the range in which the exchange rate is allowed to float, has become the latest proxy for trade risk. When the overnight fix is stronger than expected, as it was last night, it’s taken as a sign that China is not devaluing its currency as a tool in the trade war. Equity markets responded positively to the overnight fix, with gains in Asia and Europe and the S&P 500 Index positive at market open.
China’s exports grow. While China’s exports to the United States continue to decline, China’s yearly export growth moved from 1.3% contraction in June to 3.3% expansion in July, topping consensus expectations for a 1% decline. Nevertheless, economic pressure from trade tensions with the United States persist,and it’s not clear yet if the expansion of export markets outside of the United States is a sustainable structural change or a result of temporary factors as trade patterns shift in a changing environment.
Global yields continue to fall. The 10-year Treasury yield briefly fell below 1.6% yesterday before rebounding over the course of the day, and the 30-year yield approached all-time lows. Longer-term yields have declined as the combination of attractive yields relative to other developed market government bonds, easier monetary policy globally, and safe-haven preferences during equity market volatility continue to create buying pressure in Treasuries.
Making sense of the yield curve. Longer-term yields’ drop has pushed the yield curve further into inversion, the point at which long-term rates fall below short-term rates. Even though we think the current level of rates appears disconnected from U.S. economic growth prospects, bond markets are signaling increased uncertainty. We’ll dig into the yield curve’s recent movements in today’s LPL Research blog post.
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