After a second day in a row of currency-related turmoil thanks to the Chinese central bank, risk-off was definitely the order of the day as stocks sold off and investors rushed into safe haven government bonds along with gold.
Equities around the world headed south on Wednesday, with stocks in both Asia and Europe both tumbling between 2 and 3 percent.
German and French markets were hit hard once again, with auto stocks leading the fall as investors sold off the likes of premium carmakersDaimler, BMW and Volkswagen on China exposure fears. Luxury goods brands also fell, with Louis Vuitton parent group LVMH down 3.6 percent.
U.S. stocks opened sharply lower on Wednesday as a second day of decline in the yuan against the dollar increased concerns about global growth. The Dow Jones industrial average quickly fell 150 points in the open, extending Tuesday’s 212-point loss.
The People’s Bank of China allowed its currency to devalue for a second day in a row on Wednesday, cutting the daily peg which theyuan trades against the U.S. dollar by 1.6 percent, even after pledging that its unexpected move on Tuesday was a “one-off depreciation”.
In the final moments of trade in Chinese market, the central bank moved to stem the fall in the currency by buying the yuan, foreign exchange traders said, according to reports.
The yuan fell to 6.4510 against the dollar, its weakest since August 2011, after China set its “daily fix” at 6.3306, even lower than Tuesday’s cut to the daily currency peg.
The PBoC told state-owned banks to sell dollars on its behalf in the last 15 minutes of Wednesday’s trading, causing the yuan to jump about 1 percent against the greenback, reports said.
The move has prompted fresh talk of global “currency wars” additional monetary easing elsewhere, and even speculation that the U.S. Federal Reserve will be slower to raise interest rates,
Following Beijing’s initial devaluation of its currency on Tuesday, the International Monetary Fund said China’s new pricing system was a “welcome step” as it allowed markets, rather than the government to decide on the exchange rate. But the fund also warned that the plan’s success was dependent in how the Chinese implemented the new measures.
Ratings agency Standard & Poor’s said China’s shock move made “good economic sense”, dismissing fears of a currency war– where countries artificially weaken their currencies to gain a global competitive advantage.
“The move is more likely to be due to a relatively benign ‘technical correction’ aimed at improving market functioning or an effort to comply with IMF conditions to get the yuan included in the special drawing rights basket sooner rather than later,” said Standard & Poor’s chief economist for Asia-Pacific Paul Gruenwald.
“The argument that China is trying to spur growth by weakening its currency to spur exports does not strike us as very convincing,” he said.
Government bond prices were pushed higher by the flight to safety, with the yield on the benchmark 10-year Treasury note falling about 1 percent basis points on Wednesday to trade at 2.101 after closing at 2.139 percent. U.K. and German sovereign bonds were also snapped up.
Commodities however, bucked the de-risking trend, with oil and gold both seeing a boost. Gold hit a three-week high of $1,119 per troy ounce, while oil came off six year lows seen in Tuesday’s rout.
Trade in copper remained volatile, as it gained 0.8 percent at $5,170 on the London Metal Exchange after plunging to a six-year low of $5,062.
In foreign exchange markets, the dollar fell over 1 percent against a basket of currencies as the euro climbed against the greenback to trade around $1.11.
The Australian dollar plunged to a fresh six-year low against before bouncing slightly higher to trade $0.0735.