Global markets sold off sharply overnight as shares on Wall Street were down -3%, triggered by China’s willingness to let the yuan slide in response to the latest US threats on trade.
The yuan sank to its lowest level in more than a decade, as the People's Bank of China let the Chinese currency depreciate, pushing the currency below the key 7-per-dollar level for the first time since 2008. As well as US President Donald Trump’s threat of increased tariffs against China, investors are also concerned at the potential for a snap election in the UK, and strikes and unrest in Hong Kong which indicate ongoing tensions within China.
China's state media also reported that Chinese firms had suspended purchasing US agricultural products and the government says it hasn't ruled out the possibility of slapping tariffs on products purchased after August 3.
Tensions have clearly escalated, and there are growing risks around the potential impact on global economic growth. We expect another rough day for Australasian equity markets. For those who wish to protect against downside moves we think the best option is to allocate a portion of the portfolio to cash.
Stock in Focus: Rio Tinto (RIO:ASX)
Given mining giant Rio Tinto is exposed to China directly, its shares old off yesterday, which also coincided with a heavy fall in iron ore prices on Friday.
Rio also announced 1st half earnings which were largely in line with consensus. A final dividend of US151cps (consensus US178cps) was below expectations but an additional US$1bn special dividend was declared to bump up returns to shareholders for another period (US$0.61/share).
As we mentioned in our last update, we believe RIO is fully priced at the moment, reflecting the recent surge in the price of iron ore. While iron ore continues to defy gravity we believe there is a risk that prices fall once sharply once supply starts to ramp back up. While management are focused on delivering value to shareholders and have performed well in recent times, RIO’s high sensitivity to the iron ore price does make it a close to pure a play on the price of iron ore.
We currently have a HOLD rating on Rio
Members should look out for our full update on Rio to be released in our weekly report.
Australia & New Zealand Market Movers
The Australian market sold off sharply on Monday (ASX 200 index -1.90%) as Tech stocks led a market plummet, as the Chinese yuan dropped below a key level, pushing local shares to their worst session since December. Tech darlings, in particular, were hit hard as investors took profits following firm gains in the sector since January with Appen down -10%, WisTech losing -8%, Afterpay falling -8%, and Xero down -3%.
The New Zealand market started the week by selling off (NZX 50 index -0.90%) as NZ shares followed offshore markets lower amid trade tensions between the US and China and as investors await another local interest rate cut this week. China is a key market for A2 and New Zealand's entire dairy industry, and both Synlait and A2 Milk led losses yesterday.
3 Things Markets Will be Watching this Week
- US Corporate earnings season continues this week, with some Australian companies also set to make earnings announcements.
- The Reserve Bank of Australia makes an interest rate decision on Tuesday.
- The Reserve Bank of New Zealand makes its latest interest rate announcement on Wednesday.
Have a Great Day,