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China Devalues Yuan Jolting Global Markets

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China’s devaluation of the yuan triggered the currency’s biggest one-day drop since 1994, sparking a chain reaction across global markets as it weighed on competitors and raised concern that growth in the world’s second-largest economy is headed for a deeper slowdown.

The decision by the People’s Bank of China to cut its reference rate by 1.9 percent dragged down Asian currencies and pulled down stocks of exporters in the U.S. and Europe. Emerging-market equities tumbled to the brink of a bear market and industrial metals sold off, while demand for the havens of bonds and gold surged.

“It’s disappointing after one day of recovery to see oil roll back over, rates come back down and the market weaker,” Tom Wright, the New York-based director of equities at JMP Securities, said in a phone interview. “We spend a lot of time obsessing over Greece or Puerto Rico but China is a much bigger economy and a much bigger problem to the global economy and devaluing the currency is shaking people up.”

The Standard & Poor’s 500 Index slipped 0.6 percent at 10:33 a.m. in New York, after its best rally in three months. Oil plunged 3.7 percent, sending the Bloomberg Commodity Index down 1.8 percent. The yield on 10-year Treasury notes sank eight basis points, while a gauge of Asian currencies against the dollar tumbled 1.6 percent.

Stocks Sink

A rally in commodities from oil to copper helped the S&P 500 jump 1.3 percent Monday. Those trades reversed Tuesday, as companies that rely on sales to China retreated and commodities producers tumbled on concern demand will slow from China, the world’s biggest consumer of energy and metals.

Carmakers and luxury-goods producers slipped. General Motors Co. and Ford Motor Co. lost more than 1.5 percent. Caterpillar Inc., Tiffany & Co. and Apple Inc. each dropped at least 1.4 percent. Google Inc. bucked the trend, advancing 5.4 percent after saying it will reorganize into a new holding company, Alphabet Inc.

Energy shares led losses in the S&P 500 erasing two-thirds of a rally from Monday. Oil dropped after the biggest advance in a month in New York as a recovery in Iranian production pushed OPEC supplies to the highest in more than three years. West Texas Intermediate fell 3.3 percent to $43.51 a barrel and Brent crude slid 2.2 percent to $49.31.

Freeport-McMoRan Inc. sank 13 percent for the biggest drop in the S&P 500 as copper, nickel and tin dropped at least 2.5 percent in London. Aluminum slid 2 percent after Goldman Sachs Group Inc. cut its price forecasts for the metal.

Gold for immediate delivery erased an earlier decline, gaining 0.6 percent to $1,111.22 an ounce, while silver and platinum also advanced amid demand for havens.

Fed Bets

The unexpected move by China’s policy makers bolstered speculation the Federal Reserve may have to delay raising interest rates, as the threat of a slowdown in China could harm global growth, while lower commodity prices damp inflation.

Treasuries rallied, sending the yield on 10-year notes lower by eight basis points to 2.15 percent, the lowest in a week.

“Some of it is about risk aversion and some is about economic expectations,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which manages $61 billion in assets. “Devaluation of the Chinese yuan is a way for the U.S. to import deflation from China.”

U.S. data today showed worker productivity struggled to gain traction in the second quarter. Less efficiency limits how quickly the economy can grow without spurring inflation, adding another variable for policy makers to consider in deciding when to raise rates.

Currency Moves

China’s policy shift follows economic reports this month showing a plunge in overseas shipments, weaker-than-estimated manufacturing and slowing credit growth. The move heightens the risk of competitive currency devaluations as global demand wanes and fueled speculation central banks will keep interest rates lower for longer.

The dollar soared against currencies from commodity- exporting nations. The greenback advanced more than 1 percent against its New Zealand and Australian counterparts, while a gauge of Asian currencies slumped to its lowest since 2009. The euro climbed versus all of its major peers as Greece reached an accord with creditors on the terms of a third bailout.

The yuan dropped 1.8 percent to 6.3231 per dollar in Shanghai and slid 2.8 percent in offshore trading. The biggest one-day drop in the rate since China unified rates in January 1994 was a one-time adjustment, the PBOC said in a statement.

The MSCI Emerging Markets Index lost 0.9 percent, extending declines from a peak in September 2014 to more than 20 percent that left it poised to close in a bear market. Chinese airlines led the retreat on concern a weaker yuan will boost the costs of servicing dollar-denominated debt while exporters gained on speculation depreciating currencies will make them more competitive abroad.

Auto stocks in Europe sank, followed by luxury and household goods. BMW AG, Daimler AG, PSA Peugeot Citroen, Swatch Group AG, LVMH Moet Hennessy Louis Vuitton SE and Burberry Group Plc fell at least 2 percent each.

Germany’s 10-year bund yield fell five basis points, or 0.05 percentage point, to 0.65 percent. and those on U.K. 10- year government debt fell eight basis points to 1.84 percent.

Greek stocks rose for a fourth day, as the country and its creditors agreed on a deal setting out the terms of a third bailout.

The yield on Italian 10-year bonds dropped five basis points to 1.79 percent as securities from the euro area’s lower- rated nations gained an extra fillip from Greece’s accord.


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