MarketView for June 21

Summary  

It was the same old story once again with share prices giving in to a late-day selling bout in light trading on the first day of Summer as hopes for China's newfound dedication to yuan flexibility turned to doubts over just how serious China really is, or whether China was just buying a bit time prior the upcoming G20 economic summit. As a result, some solid triple digit gains by the Dow Jones industrial average melted away and all the major equity indexes closed out the day in negative territory.

The S&P 500 briefly broke above 1,130, the midpoint between its 2010 high and low and a key technical mark but was unable to hold the level, adding to the negative sentiment. The index has chalked up a gain of more than 8 percent over the past ten trading days.

Although the support for China's decision faded, pessimism that the plan would lead to higher costs on imports from China, where it seems virtually everything appears to be made, weighed on retailers. Wal-Mart ended the day down one percent to $51.02.

Even the Nasdaq’s in large-cap tech stocks were not immune. Amazon.com closed down 2.6 percent to $122.55 after it cut the price of its Kindle e-reader product to $189 from $259 in response to an announcement by Barnes and Noble that its reader would now have Wi-Fi support. Google closed down 2.3 percent to $488.56 and Microsoft ended the day down 1.9 percent to close at $25.95.

In the world of M&A, Biovail agreed to acquire Valeant Pharmaceuticals International in a complex deal worth roughly $3.3 billion. Biovail gained 14 percent to $16.67, while Valeant was up 2.3 percent at $46.90.

BP's shares fell 4.5 percent to $30.23 after an internal BP document estimated that a worst-case scenario for the Gulf of Mexico oil spill could be about 100,000 barrels per day.

China Says It Plans To Relax Currency Controls

China's surprise move to relax currency controls ahead of this weekend's G20 summit buoyed global markets and sent the yuan to a five-year peak on Monday, but caution returned as euphoria was replaced by sanity as the Street began to question the extent of Beijing's sudden new desire to loosen the yuan's 23-month-old peg to the dollar.

There is no question that if actually implemented, an easing a policy aimed at steadying its economy during the global downturn and paving the way for its currency to appreciate over the long-term would go a long way to smoothing over trade relations with the United States and other of its major trading partners.

The unexpected move sent the yuan up 0.42 percent to 6.7976 per dollar on Monday, both the biggest daily gain and the highest close since China revalued the currency and introduced a managed float regime in 2005.

But initial optimism was quickly tempered with caution as everyone sought to determine the extent of China's willingness to rethink policies which have turned it into a global export powerhouse.

China's gradual approach to yuan flexibility is a prudent step that could both manage expectations and deter massive speculative buying of Chinese assets. Furthermore, China does appear ready to allow the exchange rate to respond to market forces, and that the test now was how far and how fast Beijing would permit the yuan to move.

China's central bank ruled out a one-off revaluation of yuan and suggested it was close to fair value -- a hint change will be gradual and may not satisfy critics who say China keeps its currency artificially undervalued by as much as 25 to 40 percent in order to gain unfair trade advantage.

The currency issue is likely to feature at the summit of the Group of 20 nations in Canada on June 26-27, with many expected to seek further clarification from Beijing. Yet, despite the Chinese move, G20 leaders were expected to encounter further divisions over strategies to rebalance the global economy -- a top G20 goal since the global financial crisis of 2007-2009.

With pressure high from industry groups who want to see China's huge trade surplus brought down fast, China's sharpest critics in Congress were also unlikely to be mollified. Nevertheless, Beijing's move on the yuan -- although small by comparison with freely floating currencies -- provided an unexpected boost ahead of the G20 meeting.

The People's Bank of China (PBOC), after setting the mid-point for Monday's trading range, let the yuan rise at one point as much as 0.47 percent, just shy of the 0.5 percent limit which had been rarely tested in the past.

Chinese Commerce Ministry spokesman Yao Jian told the official Xinhua news agency that yuan reform could put pressure on exports initially, as firms were likely to face higher material costs, but would yield long-term benefits.

The Chinese move may also cut pressure on the Obama administration to formally label Beijing a currency manipulator -- a public embarrassment China's leaders hope to avoid.

Many economists see China's currency strengthening further in coming days but at a very modest pace, further diluting hopes for big market gains.