Image: NG Han Guan/Associated Press
The week of August 17th marked the U.S. Stock Market’s worst week since 2011. On August 11th, U.S stocks began to fall when China announced that it was devaluing its currency, the yuan. China’s economy, the world’s second largest after the U.S., declined dramatically this summer. In June, China’s stock market crashed which resulted in a government intervention to soften the market sell-off. Despite the aid, shares fell nearly by a third. In addition to that, consumer spending decreased, construction diminished, and property investment declined.
A policy dating back to mid 1990s lets China’s government use the U.S. dollar as a guide for managing their currency’s value against. Unfortunately for China, the U.S dollar appreciated in the past couple years making it difficult for China’s economy to catch up. Because of this, China's government struggled trying to justify securing the yuan to the dollar.
China executed it’s solution on August 11th by devaluing its currency by 2 percent — the largest single-day drop in 11 years. After that, the currency dropped gradually by another rough 3 percent before stabilizing. China’s expected outcomes from this was to increase more exports and make its currency more valuable.
Image: Getty
The devaluation of the yuan inconvenienced the global economy, since China’s economy was big enough to affect the rest of the world. In result of that, the U.S. stock market had it’s biggest drop since 2011 which raised a lot of questions. "Did the devaluation of the yuan weaken the U.S. economy?" "Is China’s slow economy going to infiltrate the United States’?”
Whatever the answer, the U.S. stock market did take a huge hit, especially on Friday, August 21st. The Dow Jones Industrial Average — a basket of top companies such as 3M, Boeing, and IBM — plunged 530.94 points. The last time Dow had its worst one-day drop was November 2008. Standard & Poor’s 500, one of the most frequently used benchmarks for the U.S. stock market, dropped 64.84 points. NASDAQ, the world’s second-largest stock exchange, tumbled 171.45 points.
Image: Reuters
Even though China’s yuan devaluation may have caused a shock to the U.S. stock market, other potential factors should be taken into consideration. The Federal Reserve recently released their July meeting's minutes which stated their discussion on raising its benchmark interest rate in September. Whether or whether not they will follow through on the rate hike caused uncertainty in investors. Another factor to acknowledge would be the oil price drop. A year ago, the oil price of a barrel was roughly $100 but it recently dipped below the $40 a barrel threshold for the first time since 2009. These probable factors may have had an impact on the U.S. stock market but the question now is, “is it over?"
