11th Aug 2015 11:16
LONDON (Alliance News) - Shares in London are trading lower midday Tuesday following a surprise move by the Chinese central bank to devalue the yuan, while US investors also are focused on Google, which said it will form a new holding company called Alphabet that will become its new listing.
China devalued the yuan by the most in two decades to cushion its exports and make the official exchange rate more market determined. The People's Bank of China said the official fixing rate has deviated from the market-determined rate by a large margin for a long time, and this action was required to close the gap. The central bank set the value of yuan at 6.2298 per dollar, 1.9% lower than Monday's official fixing rate.
This was the biggest one-day loss for the Chinese currency since 1994, when it unified the official rate with market rates. The central bank termed it as an one-time adjustment as it strives to keep the yuan stable at a reasonable level. The yuan is allowed to move with in a range of 2% from the central parity rate fixed each day.
The move follows figures from the General Administration of Customs over the weekend which showed Chinese exports declined at a faster-than-expected pace in July. Exports decreased 8.3% year-on-year in July, reversing the 2.8% increase in the previous month. Economists had expected exports to decline 1.5%.
The surprise devaluation of the yuan caused a tumble in emerging-market currencies and left analysts asking whether the currency will be allowed to weaken further to make China's export sector more competitive and prop up the economy.
"While the People's Bank of China retains huge foreign policy reserves to support the currency if needed, the effective appreciation in the yuan in recent months had been damaging to the country's exports, still the main driver of GDP growth. So today's move could be the first of many if exports continue to underperform in the coming months," says David McNamara, an analyst at Davy Group.
Burberry Group is amongst the biggest fallers in the FTSE 100, trading down 2.7% following the devaluation of the yuan. China is a key market for Burberry and it has already been hit by concerns of a slowdown in spending in the country. The devaluation of the currency will reduce its local revenue in sterling terms and has increased investor jitters about Burberry's exposure to the market.
The FTSE 100 trades down 0.7% at 6,686.96 points, and the FTSE 250 is down 0.3% at 17,703.53, while the AIM All-Share is outperforming, trading slightly higher at 753.83.
European stocks are also trading lower with the CAC 40 in Paris down 1.4% and the DAX 30 in Frankfurt down 1.9%.
Futures point Wall Street to a mostly lower open, with the DJIA down 0.6%, the S&P 500 down 0.5%, and the Nasdaq 100 down just 0.2%, helped by Google, which is higher in pre-market trade.
Google will form a conglomerate called Alphabet to hold the internet giant's increasingly diversified business units and investments far beyond its search engine brand, the company said Monday. Chief Executive Larry Page said in a blog post that Alphabet would be a "collection of companies" in which Google is the largest.
"This newer Google is a bit slimmed down, with the companies that are pretty far afield of our main Internet products contained in Alphabet instead," he wrote. "Fundamentally, we believe this allows us more management scale, as we can run things independently that aren't very related."
Greece also is back in focus after the country and its creditors reached an agreement on third bailout. After two weeks of negotiations, Greek media quoted government sources saying that a deal had been reached on a memorandum of understanding, which would spell out the economic measures Athens promises to implement in exchange for the EUR86 billion bailout.
The deal is expected to set budgetary goals for the coming year that would leave Greece with a primary surplus of 0.25% of gross domestic product. That figure represents the surplus before interest payments are made and provides an indicator of how an economy is performing. The plan would then call for primary surpluses of 0.5% in 2016 and 1.75% in 2017.
Greece's Parliament is expected to vote on whether to accept the country's latest bailout deal on Thursday, report Greek media citing government sources. Once approved by national parliaments, euro area finance ministers are expected to meet towards the end of the week to finalize the process.
"What we have at the moment is a technical-level agreement reached by the staff of the institutions and the Greek authorities," European Commission spokeswoman Annika Breidthardt said. "What we don't have at the moment is a political agreement."
After the political agreement is made, funds will be released to Greece to allow it to honour a EUR3.2 billion payment to the European Central Bank due on August 20.
"Athens will use one hand to take the bailout this week and with the other repay its creditors next week, continuing the cash merry-go-round. The nation has been surviving off of handouts for the past five years, and the feeling is that it will be living off them for another five years," says IG market analyst David Madden.
"Unless the Greek government commits to real change, the nation is doomed to remain on the same path. Traders always knew that Greece would receive the next bailout so this isn’t a time to rejoice, and dealers remain sceptical that the Athens administration will fall into its old habits," Madden adds.
On the commodities front, gold prices continue to come off their recent lows, currently trading at USD1,111.40 an ounce, lifting the share price of precious metals miners. Randgold Resources, up 2.9%, and Fresnillo, up 2.2%, lead the few FTSE 100 gainers, while Centamin, up 3.1%, and Acacia Mining, up 1.6%, are strong performers in the FTSE 250.
Prudential is not about to change its strategy of targeting the growing middle class in Asia, the retiring baby boomers in the US, and the ageing population in the UK, according to new Chief Executive Mike Wells, who on Tuesday presented increases in operating profit and a key measure of sales that beat analyst forecasts for the first half of 2015.
The life insurer's operating profit based on longer-term investment returns before tax increased by 24% to GBP1.88 billion in the six months to the end of June, beating the GBP1.74 billion analyst consensus estimates provided by the company. Annual premium equivalent sales increased by 20% to GBP2.73 billion in the half, also ahead of the relevant analyst consensus forecast of GBP2.50 billion. The company's shares trade up 1.0%.
FTSE 250-listed Synthomer is up 3.8%. The specialty chemicals company said its pretax profit rose in the first half thanks to margin improvements in its North American business and a good operating performance in Asia which offset continued sluggishness in Europe and a hit the group is taking from the weak euro.
Synthomer said its pretax profit for the half was GBP36.8 million, up from GBP29.9 million a year earlier, despite its total sales falling to GBP468.7 million from GBP510.1 million, held back by euro weakness as volumes rose by 6.8%.
On the other side of the index, SIG shares are down 3.8%. The building products company said its pretax profit was higher in the first half of 2015 than a year earlier thanks to lower exceptional costs, but revenue for the group was pulled lower both by a weakening euro and by challenging market conditions in mainland Europe, while the group said margins pressures are likely to offset some of the benefits from its cost-cutting programme.
In the AIM All-Share index, North River Resources is the worst performer, down 35%. The miner said it has proposed a USD4 million financing package to be used to back the development of its Namib lead-zinc project in Namibia. North River said the entire USD4 million financing will be underwritten by major shareholders Greenstone Resources and will be split between the issue of convertible loan notes and a placing and open offer.
Still in the economic calendar Tuesday, in the US, unit labor costs and nonfarm productivity are expected at 1330 BST. The Redbook index is expected at 1355 BST, while wholesale inventories are at 1500 BST.
By Neil Thakrar; [email protected]; @NeilThakrar1
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