Currency and stock markets drop due to yuan's sharp fall

Wednesday (August 12th) saw emerging currency markets, Asian stocks and commodities take a tumble, after China allowed the yuan to suffer a sharp drop for the second consecutive day.

Traders have been forced to seek safety in government debt amid expectations of reduced inflation.

Financial spreadbetters have predicted that Britain's FTSE 100 will open 0.6 per cent lower than the previous session, while Germany's DAX is forecast to shed 0.9 per cent. France's CAC 40 has opened with a 0.6 per cent shortfall.

Today, the People's Bank of China made the decision to set the yuan's midpoint range to less than Tuesday's closing rate, which had already taken a severe tumble after the central bank devalued the currency by almost two per cent.

The move, which took traders by complete surprise, has been described by the bank as a "one-off depreciation". It dealt a serious blow to appetite among investors for risky assets, and lead to markets across Asia nosediving, as investors feared China is heading for a damaging currency war.

Output and investment data released by the Chinese government saw yuan fall further, seeing it drop from 6.475 versus the US dollar to 6.4398 by 05:45 BST. Experts believe that the devaluation of the currency could be the start of a long-term slide in the exchange rate, which would try and make China's floundering exports market return to health.

So far, the country's currency has shed around four per cent, leading to global equities, currencies and commodities markets being hit with selling pressure as money managers are worried that if a currency war is triggered it could destabilise the global economy.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 2.1 per cent, sliding to a two-year low, while stock markets in Australia and Singapore suffered equally.  

Rajeev De Mello, head of Asian fixed income at Schroders in Singapore, told Reuters: "China's currency moves will hurt appetite for risky assets such as equities and commodities.

"While it is too early to say whether this is the beginning of a sustained devaluation of the yuan, other central banks may be forced to follow suit and that may trigger a fresh round of currency weakening around the emerging world."