Risky assets reel as China lets yuan fall for a Second Day

Asian stocks and emerging market currencies tumbled on Wednesday and commodities fell after China let the yuan fall sharply for a second straight day, forcing investors to seek refuge in safe-haven government debt.

Financial spreadbetters expect Britain’s FTSE 100 .FTSE to open 0.6 percent lower, Germany’s DAX .GDAXI to start 0.9 percent lower. France’s CAC 40 .FCHI was seen falling 0.6 percent at the open.

On Wednesday, the People’s Bank of China CNY=CFXS 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 CNY=CFXS fell further after Beijing released July output and investment data. The currency yuan, which was at 6.4275 to the dollar, weakened further to 6.4398 at 0545 GMT.

The central bank had billed Tuesday’s change as a free-market reform but experts suspect it could be the beginning of a longer-term slide in the exchange rate aimed at making China’s ailing exports more competitive.

The rapid drop in the value of China’s currency – around 4 percent in the last two days – dealt a body blow to appetite for risky assets globally, with equities, currencies and commodities coming under selling pressure as money managers feared it could ignite a currency war that would destabilize the global economy.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 2.1 percent to a two-year low. Stock markets from Australia to Singapore were a sea of red.

“China’s currency moves will hurt appetite for risky assets such as equities and commodities,” said Rajeev De Mello, head of Asian fixed income at Schroders in Singapore, which manages $10 billion in Asia.

“While it is too early to say whether this is the beginning of a sustained devaluation of the yuan, other central banks may be forced to follow suit and that may trigger a fresh round of currency weakening around the emerging world.”

On Wall Street, the Dow .DJI fell 1.2 percent and the S&P 500 .SPX shed 1 percent as China’s currency move added to worries about the global economic outlook and hit companies with large exposure to the country.[.N]

Many Western firms have already been reporting slowing sales in China as its economy cools and shares of companies from German auto makers to luxury good makers are expected to come under pressure.

Emerging market currencies from Indonesia to Brazil reeled as investors feared central banks around the world could rush to weaken their own currencies in response to China’s move.

That meant only the greenback was left standing tall with the U.S. dollar holding near a two-month high of 125.17 yen JPY=, while the broad dollar index .DXY was stuck within recent trading ranges.

Currencies considered as China proxies were singled out for special punishment, with the Australian dollar AUD=D4 nursing losses at 0.7250 per dollar after falling more than 1.5 percent overnight.

“The bottom line is that we believe investors will orientate portfolios towards more rate cuts rather than currency weakness. Real rates are way too high, in our view,” wrote Sean Darby, chief global equity strategist at Jeffries.

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

U.S. crude oil futures extended their decline with prices at their lowest since March 2009. CLc1 [O/R]

Copper and aluminum also hit six-year lows on Tuesday as the cheaper yuan fueled worries the world’s top metals consumer would cut back on imports. [MET/L]

Copper posted a modest bounce after the overnight slide, with three-month copper on the London Metal Exchange (LME) edging up 0.7 percent to $5,159 a tonne CMCU3.

Bonds were the solitary bright spot, with the benchmark 10-year Treasury note yield US10YT=RR holding near a three-month low of 2.09 percent hit overnight.

Its 10-year Japanese counterpart fell to fresh a three-month trough of 0.37 percent JP10YTN=JBTC.

Source: Reuters