U.S. stocks are likely to suffer even more this year as the value of China’s currency collapses with the rapid decline in its foreign reserves.
That's the latest message from Albert Edwards, the global strategist at Societe Generale who established his reputation as a perma-bear in 1996 with his Ice Age thesis that argued that stocks will collapse and bond values will climb because of deflation.
“A renminbi devaluation will only sever an already badly frayed safety rope,” he writes in a Feb. 4 note obtained by Newsmax Finance. “If one is looking for key technical indicators to ring the bell on the cyclical bull market — maybe it has just rung loud and clear.”
China had a record cash hoard of about $4 trillion in 2014 and it’s estimated to have burned through about $800 billion
trying to support the renminbi, or yuan, which is at five-year lows against the U.S. dollar.
A yuan devaluation is expected to intensify an Asian currency war with countries like Japan and South Korea, and would weaken China’s spending power for raw materials like oil and iron ore. Countries that export products to China, like Brazil and Saudi Arabia, would suffer from reduced spending.
“Since the spending of FX reserves imposes a monetary tightening on the economy — and one which is only intensifying — there is a limit to how much the Chinese economy can withstand,” Edwards says. “Any further large falls in reserves will only generate additional selling pressure in a frenzy of speculation of an imminent devaluation.”
A key level to watch is $2.8 trillion that the International Monetary Fund recommends as a safe level for China’s foreign reserves. The country may hit that threshold in the next few months if it keeps trying to support the yuan.
“If that occurs in the next few months, expect to see a tidal wave of speculative selling, forcing the People’s Bank of China to throw in the towel and let the market decide the level of the renminbi exchange rate,” Edwards writes.
That would be bad news for stocks. When China devalued the yuan
in August, the S&P 500 index fell more than 10 percent from its record high to a yearly closing low of 1,867.61. The index closed at 1,880.05 on February 5.
Edwards said the market is warning of further selling ahead as important technical indicators may signal the beginning of a bear market.
The 200-day moving average for the S&P 500 has crossed
below the 320-day moving average, which last happened in the market declines of 2001 and 2008.
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