In yet another sign that stocks are fragile, the S&P 500 (NYSEARCA:SPY) has lost nearly all the gains made yesterday on essentially no news. The big surprise today was China’s devaluation of the Yuan by 1.9% in what markets believe is an attempt to boost exports after abysmal data came out yesterday.
China’s move may actually be a prelude to being accepted into the IMF’s basket of currencies in what is termed Special Drawing Rights, or SDR. This would mark the Yuan as a reserve currency and place it in direct competition with the US Dollar and other major currencies. The reason that the People’s Bank of China (PBOC) may have made its move is to make the Yuan a more freely moving currency rather than maintaining a narrow peg. This is a prerequisite of the IMF for SDR status that China is known to want.
China’s ADR stocks, collected in the iShares China 25 Index ETF (NYSEARCA:FXI) are also down today, apparently not so pleased with the PBOC’s move.
With the S&P nearing technical support at 2040 and the narrow range since February continuing, chances of a waterfall decline have increased today.
Meanwhile, the Volatility Index (^VIX), the measure of fear on Wall Street, has spiked 15%, though is still quite low around 14, skirting its 52 week low of 10.9. For some perspective, the “Fear Index” shot up past 80 in 2008, and past 40 during the 2011 flash crash.
Gold (NYSEARCA:GLD) has responded well to the sudden spike in volatility, trading up for a fourth straight day along with other precious metals, suggesting traders are moving to safety as stocks continue to coil. The move to safety was confirmed by the spike in bond prices and corresponding fall in yields, with the 10-year yield down 4.5% today.
Each day will now become more important in determining if a larger correction is in order as the S&P approaches the 2040 level, which is likely the backstop to a wave of stop loss orders.