12th Aug 2015 09:46
LONDON (Alliance News) - UK stocks are incurring heavy losses mid-morning Wednesday following a second devaluation of the yuan by Chinese authorities in as many days, while the pound sank 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. Against the euro, sterling dropped to a low of EUR1.3941.
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 FTSE 100 trades down 1.5% at 6,568.20, the FTSE 250 is down 1.3% at 17,429.24, and the AIM All-Share is off 0.5% at 750.33.
European stocks are underperfoming London, with the French CAC 40 down 2.9% and the German DAX 30 down 2.6%.
The losses come 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 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 keep hold of their share of global trade.
"If there was any doubt that this was not turning into a currency war, then the argument is looking increasingly tenuous now. Tuesday's Chinese devaluation sent risk appetite plummeting (equities lower, moves into the dollar, Treasuries and gold higher) and there is little reason to not expect more of the same today," says Hantec Markets analyst Richard Perry.
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 the 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."
The devaluation of the currency continues to hit mining stocks and commodity prices as China is the largest consumer of metals, and other exporters to China.
Glencore leads the FTSE 100 fallers, down 6.6%, hitting a new all-time low in earlier trade, and BHP Billiton is down 2.5%. Burberry Group, a luxury goods retailer with significant sales in China, is down 3.2%.
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 USD1,117.39 an ounce. Randgold Resources is the biggest of the two gainers in the FTSE 100, trading up 1.7%. Critical support services provider Babcock International Group is the other gainer up 0.6%.
Elsewhere on the corporate front, Unilever shares are down 4.0% after Goldman Sachs downgraded it to Sell from Neutral.
The UK's competition regulator found that consumer goods company Reckitt Benckiser Group's acquisition of the K-Y personal lubricants brand could lead to a lessening of competition in competition and will force Reckitt to licence the K-Y brand to a UK competitor for eight years.
The final report from the Competition and Markets Authority backs the provisional findings it published back in May, when it said Reckitt's acquisition of the brand from US healthcare giant Johnson & Johnson, agreed in March 2014, to be merged with its existing Durex brand, would lead to a substantial reduction in competition in the personal lubricants market, potentially through higher prices, meaning customers buying the products would be worse off. Reckitt trades down 3.1%.
Pearson, down 0.4%, said it has struck a deal to sell its 50% stake in The Economist Group for GBP469 million in cash to Exor SpA, the investment vehicle run by Italy's Agnelli family, and to The Economist publisher itself. Under the deal, Exor will acquire 27.8% of The Economist Group's shares for GBP227.5 million, along with all of the B special shares for GBP59.5 million from Pearson. In addition, The Economist Group will acquire the rest of Pearson's shares for GBP182 million.
The decision comes after the FTSE 100-listed education and publishing company announced the sale of the Financial Times Group, which includes the Financial Times Newspaper, to Japanese media group Nikkei Inc for GBP844 million in cash last month, as part of its efforts to focus on its education business.
Zoopla Property Group is the best midcap performer, up 3.1%, after it said its UK estate agency membership returned to growth in the first four months of its current financial year and said the uSwitch price comparison business it acquired earlier in 2015 is trading well.
The FTSE 250-listed 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.
Still ahead in the economic calendar is US Energy Information Administration crude oil stocks at 1530 BST. After the close of London equity markets, there is the US monthly budget at 1900 BST.
By Neil Thakrar; [email protected]; @NeilThakrar1
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