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 The recent outperformance of bank stocks and underperformance of
utilities, both on expectations of higher Treasury yields, support
current market bets that the Fed will raise rates for the first time
in nearly a decade after its mid-September meeting.
The performance gap between the two sectors widened in favor of
financials to its largest since May 2008 shortly after the Fed's
July meeting. But this week, following the nearly 3 percent
devaluation in China's currency and a steepening decline in oil
prices, it narrowed to its tightest in more than a month.
Strategists at Bank of America/Merrill Lynch said in client notes in
the past week that China's move may be the early stages of a near 10
percent devaluation of the yuan against the U.S. dollar <CNY=> over
the next year. Such a move could translate to a 5-percent drop in
Brent crude <LCOc1>, they said.
"Most likely, there will be more volatility in the market and part
of the reason is oil prices and the worry that somehow the price of
oil is a reflection of inflation and deflation," said Quincy Krosby,
market strategist at Prudential Financial in Newark, New Jersey.
"The lower [oil] goes, the more it is a deflationary barometer. The
lower it goes, the more difficulty the Fed has raising rates."
The Fed mentioned "earlier declines in energy prices" on its latest
statement on July 29, and their downward pressure on inflation.
Since that day, U.S. crude <CLc1> has fallen more than 12 percent.
PAST THE FED, FUNDAMENTALS
Even if the yuan seems to have stabilized, its 3-percent drop
against the U.S. dollar and the possibility of a further slide will
continue to be something to watch for highly exposed companies.
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The devaluation did hit companies in several sectors, including
high-end retailers like Coach <COH.N> and Tiffany <TIF.N>. Apple
<AAPL.O>, which gets about 23 percent of its revenues from China,
according to Morgan Stanley, tumbled this week to a near seven-month
low.
For importers from China like Target <TGT.N>, Walmart <WMT.N> and
Home Depot <HD.N>, both reporting next week, the tailwind is
expected to be offset by the expectation of a slower global economic
growth, according to Michael Yoshikami, CEO of Destination Wealth
Management in Walnut Creek, California.
Estee Lauder <EL>, expected to post earnings on Monday, is among the
first high-end retailers to report after the yuan devaluation. Its
stock was on track on Friday to close the largest weekly drop since
late May.
"The whole Chinese luxury goods market, especially imported beauty
products, has been on fire for years, but in the last year things
have really turned around," said Kim Forrest, senior equity research
analyst at Fort Pitt Capital Group in Pittsburgh.
(Reporting by Rodrigo Campos; Editing by Nick Zieminski)
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