World Economy

China Move Threatens World Stocks, Commodities

China Move Threatens World Stocks, CommoditiesChina Move Threatens World Stocks, Commodities

Markets around the world fell for a second day on Wednesday, with stocks, the dollar and emerging market currencies all under pressure after China pushed the yuan lower again overnight, boosting the appeal of top-rated government bonds.

Germany's 2-year yield fell to a new record low of -0.29% as investors feared the deflationary pressures of a slowdown in China–which devalued its currency on Tuesday–would sap growth around the rest of the world. Yuan dropped sharply against the US dollar again sparking the currency's largest two-day decline in decades.

The price of industrial commodities such as oil and copper fell further–copper hit a 6-year low–after the yuan's slump and reported sub-forecast industrial production and retail sales figures for July, before rebounding.

The prospect of a US interest rate hike next month dimmed too, which dragged the dollar and US Treasury yields lower. The flip side of that was the fifth consecutive daily rise in the price of gold to a three-week peak.

US stock futures indicated Wall Street will open around 1% in the red SPc1.

"We had a decent run-up but this is all unwinding pretty quickly. A competitive devaluation of currencies is never good," Mirabaud Securities European equity sales executive, Rupert Baker, said.

"I'd be avoiding areas such as carmakers and luxury goods companies," he said.

The pan-European FTSEurofirst 300 index and the eurozone's blue-chip Euro STOXX 50 index fell 2%, extending Tuesday's 1.7% decline. Germany's DAX and France's CAC 40 underperformed, both losing 2.5%, as the yuan's slump hit German carmakers and European luxury goods stocks.

Yields Fall

On Wednesday, the People's Bank of China set the yuan's midpoint rate CNY=SAEC weaker than Tuesday's closing market rate, which had already fallen sharply after China devalued its currency by nearly 2% in a surprise move.

The yuan's spot value CNY=CFXS fell further after Beijing released July output and investment data, trading as low as 6.45 to the dollar. It has fallen nearly 4% in two days.

Sources told Reuters that the move to devalue reflects a growing clamor within Chinese government circles for a weaker yuan–perhaps up to 10% weaker–to help struggling exporters.