Stocks resumed their recent downward trend on Tuesday after overnight volatility in Chinese equity markets rattled sentiment.
China has been the center of attention in recent weeks as evidence of an economic slowdown has led to panicked selling, aggressive intervention by Beijing, and last week, the largest one-day devaluation of the yuan in what looks like a bid to restore export competitiveness.
The result has been increased pressure on commodities prices and that nagging feeling that maybe global policymakers are losing control of the situation. The yuan revaluation has unleashed currency market turmoil throughout emerging Asia with Malaysia particularly weak.
Yet investors were hopeful some stability was forming as the yuan held firm and the Shanghai Composite Index climbed out of its July lows.
That changed overnight as the index dropped 6.2%, forcing the People’s Bank of China to re-engage with another large liquidity injection and sending American markets back into worry. In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 lost 0.3%, the Nasdaq Composite lost 0.6%, and the Russell 2000 lost 0.8%.
The theme: China’s markets are growing increasingly dependent on the force-feeding of direct support from its central bank. The chart below reveals just how ridiculous — including threatening short sellers with jail time — the situation has become. History suggests this won’t end well.
The overhang isn’t going anywhere: The latest Bank of America Merrill Lynch Global Fund Manager Survey highlighted a China recession as the largest tail risk according to professionals.
On a positive note, U.S. housing remains strong (after homebuilder sentiment hit its highest level in a decade on Monday) with housing starts beating estimates to rise to the highest level since October 2007.
Earnings were mixed. Wal-Mart Stores, Inc. (NYSE:WMT) dropped 3.4% — pushing it deeper into contractionary territory, joining a host of other Dow stocks that have fallen 10% or more from their highs — after reporting an earnings miss and cutting forward guidance on tighter profit margins. Higher wages and less profitability in its pharmacy business were cited.
TJX Companies Inc (NYSE:TJX) gained 7.2% after the cut-price retailer reported a Q2 earnings beat on strong comp-store sales growth of 6% vs. the 3% analysts were looking for. Home Depot Inc (NYSE:HD) gained 2.6% on in-line earnings and a forward guidance raise.
If it seems like stocks are going nowhere fast, well … that’s because they are: According to Bespoke Investment Group, the S&P 500’s closing high/low range over the last six months is a mere 4.4%. That’s narrower than any other six-month period in history.
Market data shows that once market volatility returns, returns have been mixed over the three months that followed.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
