China's devaluation and CBA's capital raising set a nervous tone for this morning's trading

CBA’s $5bn capital raising does not come as a surprise; however investors will be anxious about its impact on the banking sector this morning.  A key issue for the short term will be the extent to which other bank stocks might be sold to make way for an increased allocation to CBA in investor portfolios.

China’s surprise devaluation yesterday has seen both commodities and commodity currencies such as the Aussie dollar sold. To some extent this simply reflects and adjustment to valuations against the $US. The fact that the Yuan is now lower against the $US makes it appropriate for the Aussie to fall against $US and other currencies to maintain an appropriate valuation against the currency of its largest export customer, China.

Weakness in both commodities and commodity currencies also reflects the possibility that there will be further devaluation of China’s currency against the $US. There are also concerns that this move may signal deepening pessimism about growth in China’s economy. This will heighten market focus on this afternoon’s release of China’s retail sales and industrial production data for the month of July.

Ironically, the initial reaction to the announcement of other forms of stimulus by China has tended to be positive whereas the currency devaluation has created concerns about why authorities consider it necessary. However, to the extent that the currency to depreciation against the $US removes the need for other more “commodity friendly” forms of stimulus such as infrastructure spending, it may be a future negative for commodity demand.  

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