Daily Management Review

China Devalues Yuan for the Second Consecutive Day, Sends World Markets Falling


China Devalues Yuan for the Second Consecutive Day, Sends World Markets Falling
China, arguably the second largest economy in the world, devalued its currency for the second consecutive day creating ripples across all international markets resulting in falls in indices.

This was the second day that the world market had fallen, the first being on Tuesday after China devalued its yuan by 2 percent on Tuesday.

The move on Wednesday further put the dollar and the currencies of the emerging markets under pressure while it boosted the appeal of top-rated government bonds.

Linking the devaluation to a slowdown in China, the investors sold heavily in the German market which resulted in Germany's 2-year yield to a new record fall of -0.29 percent. The fear among the investors was that a Chinese economical slowdown would sap growth around the rest of the world.

There was a further fall in the price of industrial commodities such as oil and copper. Before rebounding, copper hit a 6-year low and reported sub-forecast industrial production and retail sales figures for July.

The dollar and U.S. Treasury yields were dragged lower with dimming prospects of a U.S. interest rate hike next month. However as is the case in such situations, the price of gold, that had been down for quite a while a couple of months ago, there was rise in prices for the fifth consecutive day to reach a three-week peak international price.

Rupert Baker, European equity sales executive at Mirabaud Securities said: “we had a decent run-up but this is all unwinding pretty quickly. A competitive devaluation of currencies is never good”.
He advised avoiding sectors such as car-makers and luxury goods companies fearing reluctance among the consumers to purchase following the devaluation.

On Wednesday, there was a recorded fall of 2 percent in the pan-European FTSEurofirst 300 index and the euro zone's blue-chip Euro STOXX 50 index. Both the indices had fallen by 1.7 percent on Tuesday following China’s first devaluation of its currency.

There were 2.5 percentage falls in both Germany's DAX  and France's CAC 40 as the German carmakers and European luxury goods stocks were hit by the devaluation in two consecutive days.

Companies like German car-maker BMW and French luxury goods giant LVMH which extensively exports to China both recorded share slump of 2.6 percent and 3.4 percent, respectively.
FTSE 100 of Britain also feel by 1.2 percent.

Yuan’s midpoint rate was set weaker than it was on Tuesdays closing by the People's Bank of China (PBOC) on Wednesday which had already taken a hot on Tuesday after the 2 percent devaluation of the currency.

Recording a total fell of nearly 4 percent to the US dollar in the last two days, the Chinese yuan’s spot value fell further after output and investment data were released by Beijing to reach 6.4510 yuan to the US dollar.

Quoting Chinese official sources, Reuters reported that move to devalue the yuan was due to demands within the Chinese government circles to weaken the currency of up to 10 percent to help exporters gain value for exporting.

While MIAPJ0000PUS, the broadest index of Asia-Pacific shares outside Japan, was down by 1.75 percent hitting a two-year low, investors in emerging economy market from Indonesia to Brazil sold stocks under fears of a local currency devaluation in response to the Chinese yuan devaluation. 

(Sources: www.reuters.com & www.businesswire.com)