Last week was another difficult one for equity markets. The surprise move by the Chinese Central Bank to devalue the Yuan will have a far reaching effect. China has become the major trading partner for most of the world and many other countries will feel the effect as Chinese goods will become more competitive both domestically and internationally. Chinese central bank officials have tried to calm markets by saying that this was not a new long term campaign to devalue to Yuan but rather the first step in a move to a free floating currency. The target rate will now be set each day by the central bank, based on the finishing position on the previous trading day. The currency will be allowed to move 2% in each direction from this point.

Confidence will need to be developed in this new system as there is much speculation that this is the Chinese authorities manipulating the market in their favour. This currency devaluation has come after weak trade date from China. There is now a concern that these actions will spark a broad “race to the bottom” of currency depreciation as countries which compete and export to China attempt to keep their goods and services competitive. We have already seen initial market reactions weakening many other Asian currencies.

Elsewhere, many anticipate September will be the month of the first US interest rate rise. The market has currently priced in a 50% chance that this will happen. Inflation and GDP figures in addition to the Federal Reserve July Minutes will be released this week which may shed some more light on the likelihood of the rate rise. However, of increasing importance is not the timing of the first rise but the magnitude and pace of subsequent moves.

Crude oil prices continued their rout. However, there has been a greater level of stability as we approach the January low. This level will be a key technical test for the market. There is still a large amount of negative sentiment and we may yet see even lower prices.

Japan has released some important economic data today, including the latest GDP figures. These were on the whole disappointing, with the economy contracting by 0.4% in the second quarter. UK inflation data will be released on Tuesday.