Europe
European shares are dropping because the continent’s competitive advantage gained through its weak currency looks like being eroded.
The FTSE 100 has a lot of mining companies which have pulled the index lower because of their reliance on China as the biggest customer for basic resources. Germany’s benchmark index has seen steeper falls than the FTSE despite its lack of listed resource companies.
China is only the sixth biggest export destination for the UK but the second biggest for Europe so the economy in the continent should feel this yuan devaluation more.
The biggest gainers this year in the German DAX have been exporters including the likes of car companies Daimler and Volkswagen (XETRA:VOWG). China is the world’s biggest car market. These shares are now seeing the steepest losses because of the threat that the euro will continue to rise against a devalued yuan, reducing demand for Europe’s exported goods in China.
When it rains it pours so European shares were also confronted with doubts over Greece’s bailout after the Daily Bild reported the German government sees it as “insufficient.” There remains open questions on the role of the IMF, debt sustainability and privatisation.
There were only a handful of gainers on the FTSE on Wednesday with a three week high in gold prices helping gold-miner Randgold (LONDON:RRS) top the index, while a rise in oil prices helped shares of BP (LONDON:BP) and Royal Dutch Shell (LONDON:RDSa).
ARM Holdings (LONDON:ARM) was one of the biggest fallers, mirroring the performance of the shares of its biggest customer Apple (NASDAQ:AAPL) with luxury-goods maker Burberry getting stung for a second day thanks to the amount of business it does in Asia.
US
There was no place of refuge in the US stock market which saw widespread losses. Some of the most prominent high beta growth stocks like FitBit and GoPro lost over 7% while Apple, Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and Twitter (NYSE:TWTR) all lost over 2% in the first hour of trading.
Even a $4bn buyback wasn’t enough to entice investors into Alibaba (NYSE:BABA) shares after the Chinese ecommerce giant saw a bigger than expected slowdown in sales. Alibaba shares slumped 7% at the open to below $72, just 6% shy of its IPO price of $68 from less than a year ago.
FX
In a sharp turnaround from Tuesday, the US dollar was weaker across the board on Wednesday. Expectations of a rate hike by the Federal Reserve are getting pared back in light of China’s currency devaluation.
A strong US Dollar is generally deflationary for the US economy so China causing further appreciation of the dollar through the devaluation of the yuan reduces the chance of inflation moving towards the Fed’s target.
The devaluation of the Chinese yuan in dollars has caused an even larger adjustment for yuan in euros. This has caused a short-covering rally in euros against most world currencies including the US dollar.
Commodities
Gold and Silver broke out to a three week high on Wednesday as the dollar fell and investors moved to the safe-haven of precious metals and away from unstable fiat currencies that are open to government devaluation.
Crude oil rallied off six month lows as the dollar fell despite a slightly smaller than expected drawdown in US inventories.
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