Stocks, the US dollar, and emerging market currencies around the world remained under pressure for a second day yesterday after China’s yuan weakened again, one day after the country devalued its currency.
Germany’s two-year yield fell to a new record low of minus 0.29 per cent as investors feared the deflationary pressures of a slowdown in China’s economy would sap growth globally.
The prospect of a US interest rate rise by the Federal Reserve next month dimmed as a result, dragging the US dollar, financial stocks and US Treasury yields lower. The 10-year US Treasury yield fell to 2.045 per cent, the lowest in more than three months.
“China is still a big unknown, and the market is pricing in the worst,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.
Yesterday, the People’s Bank of China (PBOC) set the yuan’s midpoint rate lower than Tuesday’s closing market rate, resulting in nearly a 4.0 per cent devaluation of the yuan in two days against the US dollar.
The yuan’s spot value fell further after Beijing released weak July output and investment data, trading as low as 6.4510 to the dollar. Sources told Reuters that the move to devalue the yuan reflects a growing clamour within Chinese government circles for a devaluation of perhaps up to 10 percent to help struggling exporters.
Major stock markets lost ground worldwide, with sectors exposed to China’s economy falling most, as a lower yuan makes exports to China from the rest of the world more expensive.
Luxury goods stocks like the French giant LVMH and Coach were lower along with automakers like Germany’s BMW, which lost 2.6 per cent, and General Motors , which lost 2.4 per cent.
The Dow Jones industrial average fell 247.56 points, or 1.42 per cent, to 17,382.93, the S&P 500 lost 27.76 points, or 1.33 per cent, to 2,056.31 and the Nasdaq Composite dropped 78.33 points, or 1.56 per cent, to 4,994.52.
The pan-European FTSEurofirst 300 index and the eurozone’s blue-chip Euro STOXX 50 index fell 2.7 percent and 3.4 per cent, respectively. MSCI’s broadest index of Asia-Pacific shares outside Japan hit a two-year low, falling 1.9 per cent.
The US dollar weakened against most major currencies, with US debt yields lower also, as investors questioned whether China’s devaluation would affect the Federal Reserve’s plans to raise interest rates later this year.