China Roils Markets for Second Day as Yuan Tumbles With Stocks

Story by Bloomberg
Written by Stephen Kirkland and Jeremy Herron
Link: http://www.bloomberg.com/news/articles/2015-08-11/asian-futures-tip-another-down-day-as-yuan-move-rattles-markets

Concerns China’s economy is faltering torpedoed stocks around the world for a second day and fueled demand for the safety of gold and Treasuries.

...China’s yuan led the biggest two-day slide in Asian currencies since 2008, while speculation the financial-markets turmoil will force the Federal Reserve to delay raising interest rates sent the dollar tumbling versus the euro.

“China is a big growth driver around the world, so there’s a certain risk to global growth,” said Otto Waser, chief investment officer at R&A Research & Asset Management AG in Zurich. “If the world economy turns out to be weaker, the Fed will keep an eye on the dollar.”

Emotional Environment

China’s decision on Tuesday to devalue the yuan and shift to a more market-determined rate sparked concern that any slowdown in the world’s second-largest economy will spill over to the European and American markets.

Data Wednesday showed fixed-asset investment in China grew at the slowest pace since December 2000 in July, while the rate of expansion for retail sales and industrial production also weakened.

“In an emotional environment like this fundamentals don’t necessary play entirely into it,” Gene Peroni, a fund manager at Advisors Asset Management Inc. in Conshohocken, Pennsylvania, said in a phone interview. His firm oversees $14.7 billion. “You have reactive behavior and investors scrambling trying to reorient their portfolios and play the guessing game of what the ramifications are here.”

The devaluation is designed to cushion the yuan from strengthening along with the dollar after a projected interest-rate increase in the U.S., according to Goldman Sachs Group Inc.

Fed Liftoff

“This is about Fed liftoff most obviously and further dollar strength,” Robin Brooks, chief currency strategist at Goldman Sachs in New York, wrote in a note to clients. “It certainly makes sense for China’s policy makers to buy some flexibility ahead of Fed liftoff.”

Emerging-market currencies bore the brunt of selling in reaction. Vietnam widened the trading band on its currency Wednesday, underscoring the risk of competitive devaluations that’s dragging down exchange rates from Brazil to South Korea.

The Stoxx Europe 600 Index fell 3 percent, led by a slump in commodity producers and automakers.

Developing-nation stocks extended declines in a bear market, with the MSCI Emerging Markets Index losing 1.2 percent.

Gold rose for a fifth day, the longest stretch since May, as China’s devaluation spurred demand for haven assets. Bullion advanced 0.9 percent to $1,118.25 an ounce.

Oil rebounded from the lowest close in six years. West Texas Intermediate rose 1.5 percent to $43.73 a barrel. Crude has fallen about 30 percent since this year’s peak closing price in June amid speculation the global surplus that drove prices into a bear market will persist.