Traders cautious in yuan overhang

Investors are expected to take a cautious stance this week after the stock market took a beating last week following the move of China to devalue the yuan.

“We are to expect wider pullbacks to two-month range support as weaker signals and recent support breaks last week put downward pressures on prices. Lightening up or taking profits on trading positions is advised and then wait for a support bounce before entering a range buy,” said Luis Limlingan, analyst at Regina Capital.

Jason Escartin of F. Yap Securities said the devaluation of the yuan may likely affect the US Fed’s planned rate hike.

“It may have thrown a monkey wrench into the US Fed’s planned rate hike. A stronger dollar would put downward pressure on input prices and ultimately inflation, a central factor in the Fed’s case for an increase. While last week’s move may not be enough to completely derail the impending hike, policy makers may still pause to consider its effects on the economy,” Escartin said.

Aside from the impact of the devaluation of the yuan, Escartin said the political environment would also affect sentiment, with the 2016 elections likely to add uncertainty.

For instance, he said, investors want to know whether economic reforms would continue with the change in administration next year.

“The already flagging local economy’s immediate prospects remain bleak, with an informal six percent target put forward, while the absence of clear winners in 2016 elections adds to uncertainty. Whether government can spend its way into growth remains to be seen, since external factors have also started to weigh in. The biggest question mark remains to be whether economic reforms will continue after the current administration,” Escartin said.

Other analysts said the behavior of the market remains a reflection of sentiment during the ghost month.

“The market’s consciousness will also be blanketed by the traditionally weak period that encompasses the Chinese ghost month and the western hemisphere summer season,” said Justino Calaycay of Accord Capital Equities Corp.