World stocks tumble after China pushes yuan lower again

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 two-year yield fell to a fresh 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.

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.

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

“This is impacting risk assets due to the unpredictability of the Chinese central bank’s action and will have a knock on deflationary impact for China’s big trading partners,” FXpro senior strategist Angus Campbell said.

“Companies that are reliant on revenues from China will be shunned by investors for the second day in a row,” he said.

The pan-European FTSEurofirst 300 index and the euro zone’s blue-chip Euro STOXX 50 index both fell 2.2%, 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.

Britain’s FTSE 100 was down 1.8% while U.S. futures indicated Wall Street will open 1% in the red. On Tuesday, the S&P 500 shed 1% and the Dow Jones Industrial Average lost 1.2%.

 

Yields fall

On Wednesday, the People’s Bank of China (PBOC) set the yuan’s midpoint rate 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 fell further after Beijing released July output and investment data, losing 1.8% to trade at 6.4390 to the dollar. It has fallen nearly 4% in two days.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 2.1% to a two-year low. Stock markets from Australia to Singapore were a sea of red.

Emerging market currencies from Indonesia to Brazil reeled as investors feared central banks could rush to weaken their own currencies in response to China’s move.

The U.S. dollar, however, failed to extend its gains against emerging market currencies across the board, as falling U.S. yields and Fed rate hike expectations drove it lower.

The euro rose 1% above $1.11 for the first time in three weeks and the dollar fell 0.5% against the yen - its biggest fall in over a month - to 124.40 yen.

The probability of the Federal Reserve raising U.S. interest rates next month faded to less than 50% from nearly 60% immediately after last week’s solid employment data. December now looks more likely.

“While domestic data will still carry more importance, on balance the PBOC action reinforces our view of December liftoff,” Goldman Sachs said in a note to clients.

The ten-year U.S. Treasury yield fell to 2.05%, the lowest in over three months, and the strong demand for safe-haven bonds around the world pushed the two-year German yield to a new low of minus 0.29%.