LONDON MARKET CLOSE: Global Stocks Hit By Yuan Devaluation

LONDON (Alliance News) - Stocks across Europe ended lower Wednesday, while Wall Street remained in negative territory at the London close, after Chinese authorities devalued the yuan for the second time in as many days, with the pound regaining ground lost after a disappointing UK jobs report.

The FTSE 100 index ended down 1.4% at 6,571.19 points, and the FTSE 250 finished down 1.3% at 17,438.09, meaning it is the second consecutive negative close for both indices. The AIM-All Share shed 0.8% at 748.62.

However, London held up better than other European stock markets. The CAC 40 in Paris ended down 3.4%, and the DAX 30 in Frankfurt fell 3.3%.

At the European equities markets close, US stocks also were trading lower, with the Dow 30 down 1.3% and the S&P 500 and Nasdaq Composite both down 1.1%.

The sell-off of global stocks came after 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 had devalued the yuan by 1.9% on Tuesday. The dollar traded the yuan at CNY6.3836 late Wednesday, 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".

But some analysts were 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.

"In isolation, currency devaluation improves global competitiveness, but if what follows are further rounds of devaluations from competing economies, then a currency war may begin; and this is rarely a force for good in the global economy," said Brewin Dolphin Head of Fund Research Ben Gutteridge.

Nevertheless, Standard & Poor's Ratings Services welcomed 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," said 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."

Societe Generale analyst Aneta Markowska said the move by Chinese authorities means that a September interest rate hike by the US Federal Reserve is now a closer call. The analyst noted 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 said.

The yuan devaluation put the spotlight on quarterly results from US-listed Chinese e-commerce giant Alibaba Group. The company on Wednesday reported a sharp increase in its first-quarter profit, helped by a disposal gain. Revenue increased to 20.245 billion yuan, or USD3.265 billion, from 15.771 billion yuan in the previous year. Wall Street expected revenue of USD3.39 billion for the quarter, however. The company also announced a share buyback. The stock is down 30% since its initial public offering in September last year.

In London, the devaluation again hit mining stocks, as China is the largest consumer of metals, and other exporters to China. Glencore led the FTSE 100 fallers, down 5.7%, hitting a new all-time low during trade, while Anglo American fell 1.9%. Meanwhile, shares of Burberry Group, a luxury goods retailer with significant sales in China, lost 3.5%.

Investors shifted to gold, the traditional safe-haven asset, amid concerns about China, sending the price of the precious metal higher. Gold traded at USD1,124.18 an ounce late Wednesday. As a result, gold miners benefited, with Randgold Resources up 5.4% and Fresnillo up 0.1%.

FTSE 250 gold miner Centamin rose 11%, helped by the rise in gold prices but also by a set of positive results in which it reported a rise in its pretax profit in the first half of 2015, leading the company to increase its interim dividend by 11%. It said pretax profit for the first half of 2015 was USD47.4 million, up from USD31.9 million a year earlier, as revenue climbed to USD259.7 million from USD205.3 million. Centamin raised its interim dividend to 0.97 cents per share from 0.87 cents a year earlier.

Elsewhere, Unilever shares lost 4.3% after Goldman Sachs downgraded it to Sell from Neutral, while International Consolidated Airlines Group fell 4.4% after Kepler Cheuvreux cut the British Airways owner to Hold from Buy.

Zoopla Property Group added 3.9%. The property portal, which competes with Rightmove and which has recently faced the launch of a new player in the form of agency-back OnTheMarket, said it added 213 net new branches to its UK agency membership in the period from April 1 to July 31, returning to growth after having taken a hit from the launch of OnTheMarket. Zoopla added that the uSwitch price comparison business has continued to trade well since being acquired, with a particular boost from the energy switching market and a supportive regulatory environment for the energy business.

Meanwhile, the pound recovered after being hit following a somewhat weak 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.

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.

The pound fell sharply against the dollar, hitting a low of USD1.5536 after the data. However, sterling recovered and was standing at USD1.5649 when the London stock market closed.

In the economic calendar Thursday, the German and French consumer price indices are due at 0700 BST and 0745 BST, respectively. In the US, retail sales and initial and continuing jobless claims are all expected at 1330 BST. US Business inventories are expected at 1500 BST.

In the UK corporate calendar, Coca-Cola HBC releases half-year results, TUI Group publishes third-quarter results, and Glencore releases its half-year production report. Infinis Energy and Grainger issue interim management statements, while Cineworld Group, Michael Page International, Derwent London and Ophir Energy and Promethean World publish half-year results.

Also Thursday, blue-chips as Fresnillo, Rio Tinto, Diageo, BG Group, BT Group, GlaxoSmithKline and Pearson, among many other London-listed companies, go ex-dividend, meaning new buyers no longer qualify for the latest dividend payout.

By Daniel Ruiz; danielruiz@alliancenews.com

Copyright 2015 Alliance News Limited. All Rights Reserved.