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China Floats the Yuan!

|Includes: BP, EUO, Exxon Mobil Corporation (XOM)
The following is Phil's special morning Alert to Members (6:29 am):

[0620yuan01]Good Morning!

Major bump in the futures and I'm trying to decide if it's deserved just because China says they will float the Yuan.  Asia came on like gangbusters, Japan was, of course, super thrilled that one of their biggest customers was going to have more buying power (in theory).

Despite the rhetoric, there was no change in the official Yuan peg (but the currency traded higher) and, of course, the timing of making the announcement right before the G20 meeting (next weekend) is to take the issue off the table as things were really coming to a head with the US on the currency issue. 

On the whole, it's a good thing because China needs to slow their growth anyway and this will stall demand for their goods and thus their consumption of commodities while a rising currency will make it cheaper to buy those goods so we can imply better margins at factories - the only question is:  How much will it impact sales? 

Giving the Chinese people more spending power is kind of like raising your kid's allowance from $5 a week to $5.50 - it's really not likely to rock the global economy but, combined with recent wage hikes - it's nothing to sneeze at. 

Also, in the big picture, China was letting the Yuan appreciate to the dollar from July 2005 through July 2008 and then stopped (click on image for nice WSJ interactive).  That coincides very neatly with our entire market run and, of course, just after they stopped - we crashed.  While it certainly can't be the only factor, it's enough of a factor or even a coincidence that we may get some heavy betting that this is going to be great for our markets, whether logical or not.

China's trade surplus in May was a whopping $19.5Bn, up 48% from last year - that pretty much took away any excuse China had to hold their currency down and Shumer threatened a bill sanctioning China just 2 weeks ago.  Combine that with their 3.1% CPI in May and this decision is in our (US and China) mutual interest.

This should be Nasdaq positive (now Chinese workers can afford the IPods they make) and is good for commodities.  Frankly, there's not much downside to this other than the fact that I was short-term bearish going into the weekend and this gap up (we're up 1.5% in the futures) makes it very difficult to participate in the rally. 

Oil is up at $78.50 and the last time China floated their currency oil shot up 12% in a month so a huge gift to that sector - as I mentioned on the weekend, what policy maker can resist the opportunity to make the people who sell 85M barrels of oil per day an extra $20Bn a month ($7.85 increase)?  How many bribes would it take to make this happen and how big would they have to be?  XOM and BP alone make 10% of that money each - that will pay to clean a lot of pelicans! 

So, whatever the motive, it's a nice positive to start the week on and now let's see what holds up.  If we hold a gap fill tomorrow, that will be nice and bullish but so will simply holding NYSE 7,000.

Meredith Whitney is on CNBC at 8 so we'll see how well the futures hold up there.  Expect another Alert this morning near the open and we'll see if there's a good way to play it but, on the one hand, it's just another manic Monday with a big gap open in the futures that we used to be able to expect like clockwork when we were in rally mode in the Spring.  Maybe they skipped the pullback we expected and went right to the good part! 

Disclosure: Long on XOM and BP, short on EUO