China’s yuan move sends Asian shares to 17-month lows
Emerging market currencies are under pressure to depreciate to remain competitive
Sydney — Asian shares hit 17-month lows on Tuesday as China allowed its currency to slip past a psychological bulwark amid sharp losses in domestic share markets.
That move pressured other emerging currencies to depreciate to stay competitive.
The IMF added to the malaise by cutting forecasts of global growth for both this year and next, including downgrades to the outlook for the US, China and Europe.
“Risk sentiment is in a foul mood and stocks are sinking everywhere,” JPMorgan analysts said in a note.
“With Chinese economic momentum continuing to weaken alongside increasing pressure from the US, currency weakness is the obvious release valve,” they warned.
“A lurch through the 7.0 level by year-end is possible.”
China’s central bank on Tuesday fixed its yuan at 6.9019 per dollar, breaching the 6.9000 barrier and leading speculators to push the dollar up to 6.9320 in the spot market.
The drop should be a positive for exporters and did help Shanghai blue chips briefly edge up 0.1% in early trade before trading almost flat. Yet that follows a 4.3% slide on Monday, which was the largest daily drop since early 2016.
MSCI’s broadest index of Asia-Pacific shares outside Japan eased another 0.2% after ending Monday’s trading at its lowest point since May last year.
Japan’s Nikkei fell 1.2%, hurt in part by a rise in the safe-harbour yen.
On Monday a senior US Treasury official expressed concern about the fall in the yuan, saying it was unclear whether US treasury secretary Steven Mnuchin would meet with any Chinese officials this week.
On Wall Street, the tech-heavy Nasdaq fell for the third straight day on Monday and growth stocks were pressured by fear that rising bond yields might ultimately hobble the economy.
The S&P 500 index lost 0.04% percent and the Nasdaq composite index was off 0.67%, while the Dow Jones industrial average rose 0.15% as defensive stocks found buyers.
Safety net frays
Yields on 10-year treasury paper held at 3.24% on Tuesday, near a seven-year top.
Treasuries have had a sort of safety net up to now as rising yields tend to damp stocks and threaten the economic outlook, thus putting pressure on the Federal Reserve to go slow on policy tightening.
Yet recently the Fed has sounded so bullish on the economy and so hawkish on rates that the net has become frayed.
“The size and speed of the bearish bond impulse would suggest a collective shift in market thinking about the US growth prospects and policy projections,” said Damien McColough, Westpac’s head of rates strategy.
“The Fed’s expected 2019 profile has moved from just below two hikes to 2.5 hikes being factored in,” he said
That shift has underpinned the dollar against a basket of currencies, with the index at 95.754, from a low of 93.814 just a couple of weeks ago.
The dollar had less luck against the safe-haven yen, pulling back to ¥113.07 from a ¥114.54 peak last week.
The euro was undermined by political troubles in Italy and lapsed to $1.1490, well off September’s $1.1815 top.
Italy’s borrowing costs have surged as a war of words between Rome and the European Union over the country’s budget plans escalated.
The yield on Italian government 10-year bonds rose more than 20 basis points to 3.626%, the highest since February 2014, while Italy's FTSE MIB stock index fell to its weakest since April 2017.
Brazil’s real currency hit a two-month high and stocks jumped after market-preferred presidential candidate Jair Bolsonaro's strong first-round win on Sunday.
In commodity markets, gold got only a marginal safety bid at $1,189.41, having fallen 1.4% overnight.
Oil prices were little changed as more evidence emerged that crude exports from Iran are declining in the run-up to the reimposition of US sanctions, while a hurricane moved across the Gulf of Mexico.
Brent crude added 3c to $83.94 a barrel, while US crude firmed 5c to $74.34.