China’s two per cent devaluation of the yuan yesterday pushed the US dollar higher and hit Wall Street and other global equity markets as it raised fears of a new round of currency wars and fed worries about slowing Chinese economic growth.
US stock indices dropped more than one per cent and stocks also fell in Asia and Europe as investors contemplated the implications of a move designed to support China’s slowing economy and exports.
The MSCI All World Index of global shares fell 1.16 per cent.
“What is good for growth in China is unfortunately bad for everybody else,” said Bill McQuaker, co-head of multi-asset at Henderson Global Investors.
The Dow Jones industrial average fell or 1.4 per cent to 17,368.54. The S&P 500 lost 1.17 per cent and, to 2,079.64 and the Nasdaq Composite dropped or 1.31 per cent to 5,035.01.
Companies that sell to China were hit hard, with heavy equipment maker Caterpillar losing 3.13 per cent and Germany’s Volkswagen dropping 4 percent. Energy and materials shares also tumbled on China demand concerns, with Exxon Mobil dropping 1.76 per cent.
The pan-European FTSEurofirst 300 index lost 1.68 per cent, led lower by car makers and luxury goods companies, whose products are now more expensive for Chinese consumers.
Against the trend, Greek shares gained 2.14 per cent after Athens secured a third bailout deal with creditors.
On Chinese stock markets, airlines and importers fell, though exporters rose. The CSI300 index of the largest listed companies in Shanghai and Shenzhen lost 0.4 per cent and the Shanghai Composite closed flat.
China’s move, which the central bank described as a “one-off depreciation” based on a new way of managing the exchange rate that better reflected market forces, triggered the yuan’s biggest fall since 1994, pushing it to its weakest against the US dollar in almost three years.
In a potentially worrisome sign, China’s offshore yuan, a more liquid instrument traded out of Hong Kong, fell 2.9 per cent, exceeding the fall in the onshore yuan. It suggests more possible losses for the onshore currency, as the Hong Kong-traded yuan tends to act as a precursor to the onshore.
Emerging market currencies, which have already fallen sharply in the past year as the US dollar has strengthened, slumped again.
The Malaysian ringgit and the Indonesian rupiah hit lows not seen since the Asian financial crisis 17 years ago while the US dollar gained 2.2 per cent against Brazil’s real, putting it in range of levels not seen since 2003.
The Australian dollar, often used as a liquid proxy for the yuan, fell 1.2 per cent to $0.7322.
Investors who had held euro-funded yuan positions bought back the single currency, pushing it up 0.2 per cent to $1.1042.
The weakness in stocks boosted top-rated bonds. German 10-year yields fell five basis points to 0.64 per cent and US equivalents dropped 11 basis points to 2.1248 per cent.
The devaluation also rippled through commodity markets, driving oil prices down after Monday’s hefty gains and pushing copper futures to a six-year low.
Oil prices fell as dollar-priced commodities became more expensive, weighing on demand. Brent crude was down 2.7 per cent to $49.03. Copper futures lost 3.5 per cent to $5,130.50 per tonne.
Gold fell to as low as $1,093.25 before recovering to around $1,105 an ounce.