NEW YORK – U.S. stocks rallied again Thursday, with the Dow Jones Industrial Average closing at 16,654.77, up 369.26 points, as the Chinese government admitted intervening in foreign currency markets to prop up the value of the yuan.
The communist government also admitted simultaneously intervening in the Chinese stock market to halt further declines.
The average investor got a second breather this week as the Dow gained back Wednesday and Thursday the 1,000 points lost in opening trading Monday in a roller-coaster market that shows no signs of stabilizing.
Market Watch reported the Treasury market, a comfortable haven for many nervous investors, recovered losses on Thursday in a late afternoon rally. Pprices of Treasuries rose and pushed yields, which move in the opposite direction, down to their opening levels.
Treasury yields had opened higher Thursday morning after a U.S. Commerce Department report said the U.S. economy grew at a faster pace in the second quarter than initially estimated.
China’s stock market ended Thursday higher, but investor enthusiasm was dampened with the realization China’s central bank has been intervening in the market just before the closing bell. The strategy is to buy large capitalization stocks in an effort to turn a market that might close down into a market that looks like it is stabilizing and ready to gain.
Amid one of the most volatile stock markets in U.S. history is concern that the economy could once again tank into the kind of recession experienced in 2008 as the Dow dropped thousands of points at the end of President George W. Bush’s second term in office.
China dumping Treasuries
As WND reported Wednesday, in the past two weeks, China has sold more than $100 billion in U.S. Treasuries, as much as it has sold in the entire first half of the year. Beijing has dramatically reduced its foreign reserve holdings in Treasuries, which was estimated at $1,271 billion at end of June.
On Thursday, Bloomberg Business confirmed that China has sold massive holdings of U.S. Treasuries this month directly, as well as through agents in Belgium and Switzerland. Beijing is trying to raise the dollars needed to support the value of the yuan on foreign currency exchanges in the wake of a shock 3 percent devaluation Aug. 11 that sent global stock markets into a massive selloff.
“The People’s Bank of China has been offloading dollars and buying yuan to support the exchange rate, a policy that’s contributed to a $315 billion drop in its foreign-exchange reserves over the last 12 months,” Bloomberg Business reported. “The $3.65 trillion stockpile will fall by some $40 billion a month in the remainder of 2015 because of the intervention, according to the median estimate in a Bloomberg survey.”
Bloomberg Business further reported the latest available Treasury data and estimates by strategists suggest China controls $1.48 trillion of U.S. government debt, including about $200 billion held through Belgium, which Nomura Holdings Inc. says is home to Chinese custodial accounts.
If China continues to engage in unprecedented dumping of U.S. Treasuries, the resulting upward pressure on U.S. interest rates may force the Federal Reserve to resume an unexpected fourth round of quantitative easing. The Fed would once again take up the policy of buying additional billions of U.S. Treasuries to depress interest rates in an effort to prop up the U.S. stock market.
The popular financial blog ZeroHedge.com estimated that for every $500 billion in liquidated Chinese foreign exchange reserves, there is an attendant 108 basis point (1.08 percent) worth of upward pressure on 10-year U.S. Treasury yields.
It comes at a time when the Federal Reserve is contemplating allowing interest rates to rise before the end of the year.
WND has reported for nearly two years that the Fed, unable to sustain a policy of “quantitative easing” under which it purchased trillions of dollars of Treasury-issued debt, is running out of options to help stimulate economic growth or to reverse a sharp market selloff in the short term.
Under the leadership of Federal Reserve Chairwoman Janet Yellen, the Fed has engaged in a “pivot,” shifting concern from stimulating job growth to worrying about inflation. The fear is that without a tightening in Fed monetary policy, the U.S. economy could experience inflation as high as 5 percent in the next two years, a level not experienced since 2005.
In October 2014, the Fed under Yellen’s direction ended the policy of Quantitative Easing in which for 37 consecutive months it had bought Treasury debt in an effort to stimulate the economy by keeping interest rates at or near zero.
Under the QE bond-buying spree, the Fed’s balance sheet ballooned to a record $4.48 trillion accumulated since announcing the first round of QE purchases in November 2008.
Yellen assumed the Fed chair on Jan. 6, 2014, determined to “taper” QE borrowing down to zero by the end of 2014, a goal she achieved in October.
