Concerns about China’s economy sent shock waves across global markets on Wednesday, jolting currency markets and pummeling stocks.
U.S. stock indexes fell around 1.5% in early trade, with the Dow Jones Industrial Average off 263 points at 17138 and the S&P 500 dropping 30 points to 2054.
Metals prices fell to multiyear lows and government bonds, which usually provide safe havens for investors, climbed. The U.S. dollar sank against the euro and the yen, as some investors bet that worries over China could deter the U.S. Federal Reserve from raising interest rates.
The turmoil came as China devalued its currency for a second straight day, after the Chinese central bank pledged Tuesday to allow the market to play a greater role in setting the currency’s value.
The yuan fell as much as 1.98% Wednesday, after Tuesday’s move to weaken the currency by almost 2%.
The Chinese central bank intervened Wednesday to prop up the yuan in the last minutes of trading, according to people familiar with the matter, in an apparent effort to prevent an excessive fall in the currency.
Investors are now bracing for a more protracted slide in the yuan, heightening concerns about the slowdown in growth of the world’s second-largest economy.
“It’s sinking in that yesterday’s yuan move wasn’t a one-off,” said Mads Pedersen, head of global asset allocation at UBS Wealth Management, which oversees around $ 2 trillion of assets.
The Stoxx Europe 600 index was down 3.0% by midafternoon in Europe, with Germany’s exporter-heavy DAX index falling 3.5%. The declines mirrored a slide across the board in Asia, where Hong Kong’s Hang Seng HSNGY -3.20 % Index fell 2.4%, Japan’s Nikkei 225 index dropped 1.6% and China’s Shanghai Composite Index was down 1.1%.
“Markets are taking fright at the recent move in the [yuan]. They are afraid that it signals concern about the Chinese economy,” said Mark Evans, a fund manager at THS Partners, which oversees $ 4.6 billion in assets.
Shares in car makers, luxury goods firms, and mining companies—sectors highly sensitive to demand from China—were among the hardest hit.
In Europe, luxury goods firms Burberry Group PLC and LVMH Moët Hennessy Louis Vuitton LVMUY -4.85 % SE were down 4.1% and 4.9% respectively. French car maker PSA Peugeot-Citroën SA fell 5.9% and Daimler AG DDAIY -3.82 % was down 5.0%. Mining firm Glencore GLNCY -6.03 % PLC was down 6.4%.
A weaker yuan could hurt the competitiveness of firms outside China by making their goods and services relatively more expensive. Companies that export to China could find revenue generated in yuan is worth less in their home currency.
“We have had a positive mood in European equity markets up until now. It’s clear the slowdown in China now might be a problem for the coming months,” said Yves Maillot, head of equities at Natixis Asset Management, which oversees $ 354 billion in assets.
Mr. Maillot said there is room for stock prices to fall further, with potential for declines of 10% to 15% in the worst-hit sectors over the course of a few sessions.
However, he said he was bargain-hunting in the worst-affected sectors, such as luxury goods, and predicted broader European stock markets should soon stabilize.
Elsewhere in currency markets, the dollar fell against the euro and the yen as investors weighed up the potential impact of the weaker yuan on the Fed’s plans to raise rates this year.
A fall in the Chinese currency adds to the dollar’s broad gains this year, which act as a drag on U.S. inflation. Low inflation could hold back the Fed from lifting rates, dimming the dollar’s appeal, some fund managers said.
Beijing weakening the yuan will “put the U.S. under the spotlight as being the single large economy in the world bearing the burden of an appreciating currency,” said Jean Médecin, a member of the investment committee at Carmignac, which oversees €58 billion in assets.
This could cause the U.S. Federal Reserve to postpone an interest-rate increase that many economists currently expect in September, he said.
The euro rose 1.3% against the dollar to $ 1.1180, while the greenback fell 0.9% against the yen.
Brent crude oil was up 0.6% at $ 49.51 a barrel after a steep fall Tuesday. Gold was up 1.0% at $ 1,118.20 a troy ounce.
Copper, aluminum and nickel prices all hit more than six-year lows, while zinc hit a near four-year low.
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