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LONDON (Alliance News) - UK shares are trading lower Wednesday, while Wall Street is called for a negative open, extending Tuesday's losses after the Chinese authorities devalued the yuan for the second time in as many days.

The FTSE 100 index is down 1.0% at 6,597.75, the FTSE 250 is off 1.2% at 17,451.62, and the AIM-All Share is down 0.6% at 750.10. In Europe, major indices also are lower, with the CAC 40 in Paris down 2.3% and the DAX 30 in Frankfurt down 2.1%.

US stocks are called for a negative open, with the DJIA seen down 0.8%, while the S&P 500 and the Nasdaq Composite are both pointed down 0.9%.

"Everything that was sold off yesterday after the shock of the first Chinese devaluation of its currency can expect another day of misery after the second one," says CMC Markets analyst Jasper Lawler.

China's central bank cut its reference rate for a second time Wednesday following its surprise reduction on Tuesday. The People's Bank of China on Wednesday adjusted its daily reference exchange rate by a further 1.6%, setting it at 6.3306 to the US dollar. The central bank devalued the yuan by 1.9% on Tuesday. The dollar currently trades the yuan at CNY6.377, having hit a four-year high at CNY6.4374 earlier in the day.

Addressing market concerns Wednesday, China's central bank said there was no basis for a sustained depreciation of the yuan given international and domestic economic conditions. The PBoC had said on Tuesday that the devaluation was a one-time adjustment.

The International Monetary Fund said Beijing's move to devalue the yuan was "a welcome step", to allow market forces to have a greater role in determining the exchange rate. Similarly, the European Commission also said the move was a "positive development".

However, analysts are concerned that the Chinese devaluation to support its exports could spark a currency war, with countries trying to hold onto their share of global exports.

"China appears to have discovered a love for active FX intervention. Once is an experiment, but twice makes it a trend. The spectre of currency wars was worrying enough yesterday, but today it looks real enough to touch," says IG Markets senior market analyst Chris Beauchamp.

"A single move might have passed without reaction from China’s trading partners, but now it looks like a tit-for-tat move by others in the region is certain," writes Beauchamp. "When such moves are on the cards, the logical reaction from investors is to seek shelter in bonds, which is exactly what is happening now."

Societe Generale analyst Aneta Markowska says the move by Chinese authorities means that a September interest rate hike by the US Federal Reserve is now a closer call. The analyst notes that China's decision to devalue the yuan will not only add deflationary pressures but could also have a negligible impact on the US growth.

"The move has the potential of delaying the Fed if it triggers capital outflows out of China and other emerging countries. The Fed wants to engineer a smooth lift-off and will be very sensitive to financial conditions at the time of the September meeting. We stick with our call for a September lift-off, but acknowledge that that it has become a closer call," Markowska says.

Nevertheless, Standard & Poor's Ratings Services welcomes the Chinese move, saying it will not trigger a currency war.

"The argument that China is trying to spur growth by weakening its currency to spur exports does not strike us as very convincing," says Standard & Poor's chief economist for Asia-Pacific Paul Gruenwald. "Exports are more a function of foreign demand, with the exchange rate playing a secondary role. There is no reason for that relationship to have changed."

In the US corporate calendar, Chinese internet company Alibaba reports its first quarter results on Wednesday before the US market open.

CMC Market's Lawler says Alibaba's share price is already at the lowest it has been since the day of its IPO, having lost over 30% of its value. He says the company is attempting to diversify internationally, but it gave up on its US website and most of its revenues still come from China.

"The devaluation of the yuan would be a benefit for Alibaba if it had more international business with foreign earnings to repatriate," writes the analyst. "Alibaba operates in e-commerce, one of the fastest growing areas of China’s economy but overall China’s economy is slowing and as such sales are expected to slow."

Still in the economic calendar is US Energy Information Administration crude oil stocks at 1530 BST, while after the close of London equity markets, there is the US monthly budget at 1900 BST.

In the UK, the devaluation of the yuan continues to hit mining stocks, as China is the largest consumer of metals, and other exporters to China.

Glencore leads the FTSE 100 fallers, down 5.2%, hitting a new all-time low in earlier trade, and BHP Billiton is down 1.5%. Burberry Group, a luxury goods retailer with significant sales in China, is down 2.5%.

There were more signs of weakness in the Chinese economy after the country's industrial production growth was reported to have slowed by more than expected in July. Data from the National Bureau of Statistics showed that industrial production expanded 6.0% year-on-year in July, slower than June's 6.8% increase and 6.6% rise forecast by economists. Retail sales growth slowed marginally to 10.5% from 10.6% in June. The growth rate was expected to remain unchanged at 10.6%.

Investors are flocking to gold, the traditional safe-haven asset, amid concerns about China, sending the price of the metal higher. Gold currently trades at USD1,117.72 an ounce. Randgold Resources is the biggest gainer in the FTSE 100, trading up 2.1%.

Oil-related stocks also are higher as Brent oil prices rise. Royal Dutch Shell 'B', up 0.5%, BG Group, up 0.4%, and BP, up 0.4%, are amongst the few stocks trading in the green among London blue-chips. Brent oil is moving closer to the USD50 level, trading at USD49.77.

Elsewhere, Unilever shares are down 3.6% after Goldman Sachs downgraded it to Sell from Neutral.

In the AIM-All Share index, Pure Wafer is up 24%. The company, which provides silicon wafer reclaim services to semiconductor companies, confirmed it will have a surplus of funds from the insurance settlement for the fire at its Swansea facility in December and said it has now sold off the site, as underlying trading remains in line with its expectations. The company is planning to return the surplus funds to shareholders and said the funds will translate to 140 pence to 145p per share. The stock trades at 158.00p.

Utilitywise is down 12%. The energy and water consultancy said it expects revenue for the last financial year to be "slightly ahead" of expectations and substantially up from the previous year as it announced its deputy chief executive has resigned from the company, though it warned its earnings will miss market expectations. While revenue will come in ahead, the company said ongoing investment in its marketing division, European sales trials and staff in the second half of the financial year will mean its earnings before interest, tax, depreciation and amortisation for the year will be "slightly below market expectations".

Outside UK companies, the pound took a hit against other major currencies after a UK jobs report. The UK unemployment rate was 5.6% for the three months to June, compared to 5.5% in three months to March, though down notably from 6.3% in the same period of last year. There were 1.85 million unemployed people in April to June, 25,000 more than in January to March period, data from the Office for National Statistics showed.

Average earnings including bonuses increased 2.4% from last year, missing expectations of a 2.8% rise following a 3.2% rise in the three months to May. Excluding bonus, pay climbed 2.8%, in line with estimates.

The pound fell sharply against the dollar, hitting a low of USD1.5536 after the data. Sterling has recovered some ground and stands at USD1.5581. Against the euro, sterling dropped to a low of EUR1.3941, standing Wednesday mid-morning at EUR1.3984.

More positively, UK jobless claims declined unexpectedly in July. The number of people claiming unemployment benefits declined by 4,900 in July from June, while it was expected to rise by 1,000. The claimant count rate held steady at 2.3% as expected by economists.

By Daniel Ruiz; danielruiz@alliancenews.com

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