Stocks, yields tumble after China pushes yuan lower again

[August 12, 2015]  By Jamie McGeever

LONDON (Reuters) - 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 percent 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, before rebounding.

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 daily rise in the price of gold to a three-week peak.

U.S stock futures indicated Wall Street will open around 1 percent in the red.

"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 euro zone's blue-chip Euro STOXX 50 index fell 2 percent, extending Tuesday's 1.7 percent decline.

Germany's DAX and France's CAC 40 <.FCHI> underperformed, both losing 2.5 percent, as the yuan's slump hit German carmakers and European luxury goods stocks.

German carmaker BMW and French luxury goods giant LVMH, both big exporters to China, were down 2.6 percent and 3.4 percent, respectively.

Britain's FTSE 100 was down 1.2 percent.

YIELDS FALL

On Wednesday, the People's Bank of China (PBOC) 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 percent in a surprise move.

The yuan's spot value fell further after Beijing released July output and investment data, trading as low as 6.4510 to the dollar. It has fallen nearly 4 percent 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 percent weaker - to help struggling exporters.

MSCI's broadest index of Asia-Pacific shares outside Japan  hit a two-year low, closing down 1.75 percent.

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 percent above $1.11 for the first time in three weeks and the dollar fell 0.5 percent 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 about 40 percent from nearly 60 percent immediately after last week's solid employment data.

"If the Fed is still intent on raising rates in September ... then it would suggest that the agenda was being driven by the need to get off ZIRP (zero interest rate policy) rather than a true evaluation of the economic outlook," Deutsche Bank strategists said in a note on Wednesday.

"At this juncture, they should be looking at hawkish quantitative easing rather than dovish tightening."

The ten-year U.S. Treasury yield fell to 2.045 percent,  the lowest in over three months, and the strong demand for safe-haven bonds around the world pushed the 2-year German yield to a new low of minus 0.29 percent.

Commodities investors worried that prolonged yuan weakness could revive deflationary pressures, with a 19-commodity Thomson Reuters/Core Commodity CRB Index holding near lows not seen since 2003.
 

In European trading, however, the weak dollar helped oil and copper bounce off their lows to claw back some ground, and lifted gold to a three-week high of $1,119.890 an ounce.

(Additional reporting by Saikat Chatterjee in Hong Kong and Sudip Kar-Gupta in London; Editing by Louise Ireland; To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting; for the MacroScope Blog click on http://blogs.reuters.com/macroscope; for Hedge Fund Blog Hub click on http://blogs.reuters.com/hedgehub)
 

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