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U.S. stocks hit hard by China's faltering economy

August 12, 2015

Concerns that China’s economy is faltering torpedoed stocks around the world for a second day and fueled demand for the safety of gold and Treasuries.

The Standard & Poor’s 500 index sank 1.4 percent Wednesday morning, giving it the worst two-day retreat since January and erasing its gain for 2015. The Stoxx Europe 600 plunged 3 percent, headed for its worst day since October.

China’s yuan led the biggest two-day slide in Asian currencies since 2008, while speculation the financial-markets turmoil will force the U.S. Federal Reserve to delay raising interest rates sent the dollar tumbling versus the euro.

“China is a big growth driver around the world, so there’s a certain risk to global growth,” said Otto Waser, chief investment officer at R&A Research & Asset Management AG in Zurich. “If the world economy turns out to be weaker, the Fed will keep an eye on the dollar.”

The S&P 500’s drop sent it careening through its 200-day moving average, a level that has halted previous selloffs this year. The yield on 10-year Treasuries dropped five basis points to 2.09 percent, the lowest since May.

China’s decision on Tuesday to devalue the yuan and shift to a more market-determined rate sparked concern that any slowdown in the world’s second-largest economy will spill over to the European and American markets.

Data Wednesday showed fixed-asset investment in China grew at the slowest pace since December 2000 in July, while the rate of expansion for retail sales and industrial production also weakened.

Reactive behavior

“In an emotional environment like this, fundamentals don’t necessary play entirely into it,” Gene Peroni, a fund manager at Advisors Asset Management Inc. in Conshohocken, Pennsylvania, said in a phone interview. His firm oversees $14.7 billion. “You have reactive behavior and investors scrambling trying to reorient their portfolios and play the guessing game of what the ramifications are here.”

The devaluation is designed to cushion the yuan from strengthening along with the dollar after a projected interest- rate increase in the U.S., according to Goldman Sachs Group Inc.

“This is about Fed liftoff most obviously and further dollar strength,” Robin Brooks, chief currency strategist at Goldman Sachs in New York, wrote in a note to clients. “It certainly makes sense for China’s policy makers to buy some flexibility ahead of Fed liftoff.”

Gains by the dollar are fading as investors speculate that the yuan’s devaluation will slow inflation globally. Traders pushed down the odds on a September rate increase by the Fed to about 40 percent on Wednesday, from 54 percent as recently as Aug. 7, according to data compiled by Bloomberg.

Dow rout

U.S. government debt is getting a boost from a drop in the inflation outlook, with the 10-year break-even rate sliding as low as 1.62 percentage points, the lowest since March.

The S&P 500 slid the most in more than two weeks Tuesday, while the Dow Jones industrial average had the biggest reversal since last October’s selloff, erasing three-quarters of Monday’s gain—an advance that itself had wiped out the previous week’s decline.

The Dow tumbled another 1.2 percent Wednesday, bringing its two-day slide to 2.4 percent, the most since March 26. All but one of the 30 stocks retreated, with Apple Inc. sliding 2.2 percent, leaving it 17 percent below a February high.

Alibaba Group Holding Ltd. declined 5.5 percent as revenue missed estimates. The company also said it will buy back as much as $4 billion of stock as it tries to revive a share price battered by concerns about China’s economy.

The Stoxx Europe 600 Index fell 3 percent, led by a slump in commodity producers and automakers.

Europe assets

Emerging-market currencies bore the brunt of selling in reaction. Vietnam widened the trading band on its currency Wednesday, underscoring the risk of competitive devaluations that’s dragging down exchange rates from Brazil to South Korea.

European currencies led developed-market gains in foreign-exchange markets as the Bloomberg Dollar Spot Index reversed an earlier advance to drop 0.7 percent.

The euro jumped 1 percent, to $1.1153, rising for a sixth day and reaching its highest level since July 13. The yen strengthened 0.8 percent, to 124.16 per dollar, amid speculation the Bank of Japan doesn’t want it to weaken much further.

Developing-nation stocks extended declines in a bear market, with the MSCI Emerging Markets Index losing 1.2 percent.

Gold rose for a fifth day, the longest stretch since May, as China’s devaluation spurred demand for haven assets. Bullion advanced 0.9 percent, to $1,118.25 an ounce.

Most industrial metals fell as nickel plunged to the lowest level since 2008, while copper and aluminum traded near six-year lows. Nickel fell as much as 15 percent on the London Metal Exchange to $9,100 a metric ton before paring losses to 2.1 percent. The drop was the biggest since 2011.

Oil rebounded from the lowest close in six years. West Texas Intermediate rose 1.5 percent to $43.73 a barrel. Crude has fallen about 30 percent since this year’s peak closing price in June amid speculation the global surplus that drove prices into a bear market will persist.

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