Yuan’s devaluation clobbers global markets, sparks fear of currency war

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Quote:China’s 2 percent devaluation of the yuan hit global equities and US oil prices on Tuesday with investors fearing a new currency war as well as declining Chinese economic momentum.

Wall Street ended lower 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 per cent.

"What is good for growth in China is unfortunately bad for everybody else," said Bill McQuaker, co-head of the multi-asset team at Henderson Global Investors.

The Dow Jones industrial average fell 1.21 per cent to finish at 17,402.84 and the S&P 500 moved 0.96 per cent lower to 2,084.07. The Nasdaq Composite dropped 1.27 per cent to 5,036.79.

Oil prices declined as dollar-priced commodities became more expensive, weighing on demand. US crude lost more than 4 per cent to $43.08 a barrel, its lowest settlement since March 2009.

"It’s time to sell any and all rallies," said Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow in New York, who believes oil prices are heading lower.

Companies that sell to China were hit hard, with heavy equipment maker Caterpillar losing 2.65 per cent. Natural resource company Freeport-McMoRan dropped 12.27 per cent.

The pan-European FTSEurofirst 300 index lost 1.68 percent, 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 euro hit its highest against the dollar in a week and a half, at $1.10890, before paring gains.

The weakness in stocks boosted top-rated bonds. German 10-year yields fell 5 basis points to 0.64 per cent and US equivalents dropped 11 basis points to 2.1248 per cent.

Washington has for years pressed Beijing to liberalize its control of the yuan to allow it to strengthen given China’s high rate of economic growth and massive exports.

But Chinese growth is now slowing and the new exchange rate mechanism gives markets greater ability to push the yuan lower, just as the United States prepares to raise interest rates, a step that may add further to US dollar strength.

Investors are now wondering whether China’s devaluation will keep the Federal Reserve from raising US rates in September as many anticipate.

"People seem to be trading this as a reason for Fed delay," said Michael Wallace, global market strategist at Action Economics in San Francisco. "This puts the Fed tightening horizon back on the table in terms of discussion."

The big question now for emerging markets, where economic growth has slowed and capital flight has increased, is whether their officials respond to China’s move in kind.

"The key will be the response of other central banks ... There should be further pressure on the currencies of China’s trade partners," said Nick Lawson, managing director at Deutsche Bank in London.





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