China’s Devaluation of Yuan Jolts Global Markets

August 11, 2015 in News by RBN Staff

Greece and its creditors agree [to] terms for a third bailout, but some details remain unresolved

China devalued its tightly controlled currency on Tuesday, following a slump in trade, triggering the yuan's biggest one-day decline in a decade.

China devalued its tightly controlled currency on Tuesday, following a slump in trade, triggering the yuan’s biggest one-day decline in a decade.


Source: Wall Street Journal

China’s devaluation of its currency jolted global markets Tuesday, hitting stocks and commodities and boosting government bonds.

The Dow Jones Industrial Average fell 1.2% to 17402.84, erasing most of the previous session’s gains. The S&P 500 fell 1% to 2084.07. The pan-European Stoxx Europe 600 index closed 1.6% lower.

Oil and metals prices also fell sharply, while demand for haven assets pushed down bond yields in the U.S. and Europe, as investors worried that Beijing’s move signaled concerns over growth in the world’s second-largest economy.

The moves came after the People’s Bank of China on Tuesday pushed down the yuan’s trading range against the dollar, setting its daily fixing rate 1.9% lower. Investors reacted to the move by pushing the yuan down almost 2% from that level.

Financial markets saw it as a sign that Chinese authorities believe it is necessary to act to boost flagging growth, said Ewen Cameron Watt, chief investment strategist at BlackRock’s Inc.’s Investment Institute.

“For markets today it’s a case of shoot first, ask questions later,” said Mr. Watt, whose firm oversees $4.7 trillion in assets.

A weaker yuan could hurt the competitiveness of firms outside China by making their goods and services relatively more expensive, while companies that generate sales in China could find revenue and profit generated in yuan are worth less in their home currency.

“Worries about what this might mean for the competitiveness of the West versus the East” are driving the stock market selloff, said Chris Jeffery, an asset-allocation strategist at Legal & General Investment Management.

Shares of companies that export to China, including luxury-goods firms, car makers and mining companies, came under the most intense pressure.

In Europe, shares in LVMH Moët Hennessy Louis Vuitton SE fell 5.4% and Gucci owner Kering SA was 3.9% lower. Car maker BMW AG lost 4.3% and Daimler AG fell 5.2%, dragging Germany’s export-heavy DAX index to a 2.7% decline.

Shares in BHP Billiton PLC were down 5.0% and Rio Tinto PLC lost 3.1%.

Yields on 10-year U.S. Treasury bonds fell to 2.139%, the lowest closing level since May 29. The equivalent German yield fell to 0.59%. Yields fall as prices rise.

“The market is still trying to work out if this is a one-off move or the start of something more significant,” said Talib Sheikh, a multiasset fund manager at J.P. Morgan Asset Management, which oversees $1.8 trillion in assets.

“We think the risks are they’ll have to engage in further measures” to weaken the currency, he added.

Athens stocks bucked the trend after Greece and its international creditors agreed on the terms of a third bailout. The deal could provide up to €86 billion in financing if it is ratified by other eurozone governments.

The Athex Composite index closed 2.1% higher. Greek stocks saw some of the largest gains in Europe, with National Bank of Greece SA up 5.0%.

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