The devaluation of the yuan worries markets

Financial markets around the world fell for a second day after China continue to devalue its currency. On Wednesday, the central bank announced a reference rate for the yuan, lower than the closing level on Tuesday, when surprised markets with a fall of 1.9%. During the course of trade fell by another 1.8% to 6.4390 yuan to the dollar, which impacted data deterioration in the manufacturing sector and investment. So for two days yuan depreciated by 4% and reached its lowest level since August 2011

Market reaction

News from China led to a decline in shares, industrial metals and currencies of emerging markets, as investors flocked to safe government securities. The index of shares in the Asia-Pacific MSCI slid 2.15, while the pan-European FTSEurofirst 300 indices Euro STOXX 50 lost 2.2 percent in after the previous day dropped by another 1.7 percent. The main indexes in Germany and France fell by over 2%, while futures on Wall Street also remained in the red after falling more than 1 percent the previous session. Increased demand for safe assets decreased yields on 10-year US government bonds to quarterly low of 2.05%, while that on two-year German bonds reached a record high of minus 0.29%.

The currencies of emerging markets from Indonesia to Brazil are impaired as markets expect these countries to respond to China’s policy with its own devaluation. However, the dollar stopped its appreciation for the decline in interest rates on bonds and changed expectations for Fed policy. The probability the Fed to take increasing interest in September fell sharply due to recent changes in the market, most experts are already betting that happen early in December. The weakening of the dollar helped oil and gold to recover part of the losses of the previous days, but copper depreciated by 0.5%.

Change in direction

People’s Bank announced the lowering of the course on Tuesday as a single adjustment in line with market expectations. The new decline, however makes analysts expect lasting change in policy and long-term weakness of the yuan. “There is no compelling reason to strengthen the yuan. Economic fundamentals and speculative pressures point to sustained weight loss,” said analysts at Societe Generale, cited by the Financial times.

Beijing maintained a higher rate of the yuan as part of efforts to stimulate domestic demand. The slowdown in exports, production and overall economic growth in recent months, however, make the authorities to return to the stimulation by a weakening of the course. Another reason could be the desire of China yuan to be included in the basket of reserve currencies to the International Monetary Fund. “Reforms in the currency market to greater transparency and, depending on the market can help it,” noted analysts at Standard Chartered. Devaluation of the yuan, however, creates concerns Harden of currency wars, and US politicians urge Washington to take sanctions against this policy of China, which allegedly gives an unfair advantage to Chinese exporters.