Stocks, yields stumble after China lets yuan fall again

By David Gaffen

NEW YORK (Reuters) - Stocks, the U.S. dollar, and emerging market currencies around the world remained under pressure for a second day on Wednesday after China's yuan weakened again, a day after the country devalued its currency.

Major Wall Street averages pared losses by late afternoon, however, as Apple and energy shares reversed direction to trade higher.

On Wednesday, 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 percent devaluation of the yuan in two days against the U.S. dollar.

Shares in China dropped 1 percent overnight, and equity markets around the world dropped as well. Sectors exposed to China's economy fell the 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 (NYSE: COH) were lower, along with automakers like Germany's BMW , which lost 3.7 percent.

“China is still a big unknown, and the market is pricing in the worst” scenario, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

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 clamor within Chinese government circles for a devaluation of perhaps up to 10 percent to help struggling exporters.

The U.S. dollar weakened against most major currencies, with U.S. 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.

Short-term U.S. interest rates markets signaled that traders see no more than a 40 percent chance that the U.S. central bank will raise rates at its Sept. 16-17 meeting, even though the effective Fed funds rate rose to 0.15 percent on Wednesday, the highest since April 2013.

“China’s move has raised more questions than answers about the shape of the global economy, so markets see that as detracting from a Fed rate hike in September," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

U.S. Treasury debt prices rose on Wednesday, with yields on benchmark 10-year notes brushing a three-month low. Those gains were pared as stocks recovered, however, with the yield at 2.15 percent, about even with the previous day.

The dollar recovered some of the day's losses, but was still down against other currencies. The euro rose 1.1 percent, breaching $1.11 for the first time in three weeks and the U.S. dollar fell 0.7 percent against the yen to 124.19 yen .

Emerging market currencies reeled as investors feared central banks could rush to weaken their own currencies in response to China's move.

The Dow Jones industrial average <.DJI> fell 0.33 points to end barely changed at 17402.51, the S&P 500 <.SPX> rose 1.98 points, or 0.1 percent, to 2,086.05 and the Nasdaq Composite <.IXIC> added 7.59 points, or 0.15 percent, to 5,044.39.

The pan-European FTSEurofirst 300 index <.FTEU3> and the euro zone's blue-chip Euro STOXX 50 index <.STOXX50E> fell 2.7 percent and 3.4 percent, respectively.

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> hit a two-year low, falling 1.9 percent.

The price of industrial commodities were lower at one point, with copper hitting a six-year low, before rebounding.

Gold rose for the fifth consecutive day, rising to $1,124.51 an ounce . U.S. crude was up 0.5 percent at $43.31 a barrel, while copper gained 1.2 percent to $5,186 a tonne.

(Additional reporting by Saikat Chatterjee in Hong Kong, Sudip Kar-Gupta in London and Sam Forgione in New York; Editing by Clive McKeef and Nick Zieminski; To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting; for the MacroScope Blog click on http://blogs.reuters.com/macroscope; for Hedge Fund Blog Hub click on http://blogs.reuters.com/hedgehub)

You May Also Be Interested In

• Futures falter as Meta Platforms weighs on megacaps
• India's Tech Mahindra misses Q4 revenue view on weak communications segment
• Ukraine, Israel bill to bolster Lockheed, RTX profits