China’s Record Yuan Has Goldman Ringing an S&P 500 Warning

The Chinese renminbi is gaining against the dollar as local traders push the currency toward its best quarter on record. | Source: Shutterstock.com

• Goldman Sachs chief Asia-Pacific equity strategist Timothy Moe sees a stronger Chinese yuan over the next year.
• If the Chinese yuan outperforms the dollar, it would buoy Chinese stocks while placing pressure on the S&P 500.
• Historically, a stronger currency benefited equities. The stimulus stalemate puts the U.S. dollar in a vulnerable position.

Over the next year, analysts at Goldman Sachs anticipate the Chinese yuan to strengthen. A weakening dollar could hinder the momentum of the S&P 500, historical cycles show.

The S&P 500 index has been relatively stagnant throughout the last month. Since August 17, the index slightly rose by 0.1%, consolidating after a 5% drop from its peak.

Blackstone’s expectations of a 10-year slump supplement the prospect of a stagnant S&P 500 from a weakening dollar.

On September 16, CCN.com reported that Blackstone’s executive vice-chairman Tony James sees a possible long-term stock market drought.

If Chinese Yuan Outperforms the Dollar, It Could Slow Down the S&P 500

Timothy Moe, the chief Asia-Pacific equity strategist at Goldman Sachs, reaffirmed the yuan’s investment bank’s optimistic stance.

In the next 12 months, Moe said Goldman Sachs foresees the yuan rising to 6.5 per dollar. The positivity around the yuan coincides with the U.S. economic growth slowdown.

A stronger yuan could serve as a favorable backdrop for Chinese stocks. For the S&P 500, it could lead to a potential downturn. Moe said:

“Historical evidence is very, very clear that a strengthening currency is generally supportive for the equity market.”

In contrast, a weakening currency has typically led to an extended stock market underperformance.

According to Moe, the dollar faces a “structural period of weakening.” It has outperformed other reserve currencies for several years, but the economic decline has intensified its recent decline.

Since August, strategists have consistently said that the eurozone’s new stimulus makes the euro more compelling than the dollar.

The confluence of the euro outperforming the dollar and the stimulus stalemate in the U.S. amplify a dollar downturn.

One variable that could prevent another S&P 500 pullback is a stimulus package approval.

A multi-trillion dollar stimulus bill would allow the government to release direct checks and buoy the economy. That would strengthen the dollar and possibly refuel the retail demand for stocks.

Various studies found that the majority of stimulus checks in April were used for trading stocks.

Strategists say tech and growth stocks could still fuel the bull trend of the S&P 500. Watch the video below:

But if the stimulus stalemate carries on towards the end of 2020, it presents a real threat to the S&P 500.

The U.S. dollar also comes off a 5-month downtrend against strong reserve currencies, like the Swiss franc and the Japanese yen.

It Could Mean a Chinese Bull Market

A side-effect of the dollar’s slump would be a strengthening Chinese stock market and other domestic markets.

Moe described the prospect of a rising yuan and a declining dollar as a “tailwind” for Chinese stocks. The analyst explained:

“The (yuan) would be just an extra tailwind for those ongoing structural themes.”

Considering that stimulus is the only catalyst that could save the dollar in the near term, the sentiment around a new stimulus package remains positive.

On September 17, U.S. President Donald Trump wrote:

“Go for the much higher numbers, Republicans, it all comes back to the USA anyway (one way or another!).”

The U.S. dollar has slightly increased overnight after President Trump’s tweet, encouraging Republicans to secure a deal.

Disclaimer: This article reflects the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.