Global stocks, yields tumble after China pushes yuan lower again

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Markets around the world fell for a second day on Wednesday, with stocks, the dollar and emerging market currencies all under pressure after China pushed the yuan lower again overnight, boosting the appeal of top-rated government bonds.

Germany's 2-year yield fell to a fresh record low of -0.29 percent as investors feared the deflationary pressures of a slowdown in China - which devalued its currency on Tuesday - would sap growth around the rest of the world.

The price of industrial commodities such as oil and copper fell further - copper hit a 6-year low - after the yuan's slump and reported sub-forecast industrial production and retail sales figures for July.

The prospect of a U.S. interest rate hike next month dimmed too, which dragged the dollar and U.S. Treasury yields lower. The flip side of that was the fifth consecutive rise in gold prices to a three-week high.

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Global stocks, yields tumble after China pushes yuan lower again
Chinese one-hundred yuan banknotes are arranged for a photograph in Tokyo, Japan, on Tuesday, Aug. 11, 2015. China devalued the yuan by the most in two decades, a move that rippled through global markets as policy makers stepped up efforts to support exporters and boost the role of market pricing in Asia's largest economy. Photographer: Tomohiro Ohsumi/Bloomberg via Getty Images
A teller counts yuan banknotes in a bank in Lianyungang, east China's Jiangsu province on August 11, 2015. China's central bank on August 11 devalued its yuan currency by nearly two percent against the US dollar, as authorities seek to push market reforms and bolster the world's second-largest economy. CHINA OUT AFP PHOTO (Photo credit should read STR/AFP/Getty Images)
A teller counts yuan banknotes in a bank in Lianyungang, east China's Jiangsu province on August 11, 2015. China's central bank on August 11 devalued its yuan currency by nearly two percent against the US dollar, as authorities seek to push market reforms and bolster the world's second-largest economy. CHINA OUT AFP PHOTO (Photo credit should read STR/AFP/Getty Images)
Trader Anthony Riccio works on the floor of the New York Stock Exchange Tuesday, Aug. 11, 2015. U.S. stocks opened lower on Tuesday, led by declines in energy and materials stocks as commodities prices dropped. Prices for oil and copper fell sharply after China's government lowered the value of its currency, suggesting weakness in the world's second-largest economy. (AP Photo/Richard Drew)
Specialist Patrick Murphy, left, and trader Michael Milano work on the floor of the New York Stock Exchange Tuesday, Aug. 11, 2015. U.S. stocks opened lower on Tuesday, led by declines in energy and materials stocks as commodities prices dropped. Prices for oil and copper fell sharply after China's government lowered the value of its currency, suggesting weakness in the world's second-largest economy. (AP Photo/Richard Drew)
A Chinese yuan sign is seen at a currency exchange shop in Hong Kong, Tuesday, Aug. 11, 2015. China devalued its tightly controlled currency Tuesday following a slump in trade, allowing the yuan's biggest one-day decline in a decade. (AP Photo/Vincent Yu)
Women is reflected on a glass as they walk past a stand displaying a newspaper reporting that China's central bank or People's Bank of China announced the 2015 edition of the 100 renminbi notes will be issued starting from November 12, in Beijing Tuesday, Aug. 11, 2015. China devalued its tightly controlled currency on Tuesday following a slump in trade, triggering the yuan's biggest one-day decline in a decade. (AP Photo/Andy Wong)
A man reads a newspaper reporting that China's central bank or People's Bank of China announced the 2015 edition of the 100 renminbi notes will be issued starting from November 12, at a stand in Beijing Tuesday, Aug. 11, 2015. China devalued its tightly controlled currency on Tuesday following a slump in trade, triggering the yuan's biggest one-day decline in a decade. (AP Photo/Andy Wong)
Trader Edward Curran works on the floor of the New York Stock Exchange Tuesday, Aug. 11, 2015. U.S. stocks opened lower on Tuesday, led by declines in energy and materials stocks as commodities prices dropped. Prices for oil and copper fell sharply after China's government lowered the value of its currency, suggesting weakness in the world's second-largest economy. (AP Photo/Richard Drew)
A woman cleans a shop window on which currency signs are reflected in Hong Kong on August 11, 2015. China's central bank cuts the reference rate for its yuan currency against the US dollar by almost two percent, reportedly a record reduction, as it seeks to bolster flagging economic growth. AFP PHOTO / Philippe Lopez (Photo credit should read PHILIPPE LOPEZ/AFP/Getty Images)
A pedestrian walks past a Chinese yuan currency sign in Hong Kong on August 11, 2015. China's central bank cuts the reference rate for its yuan currency against the US dollar by almost two percent, reportedly a record reduction, as it seeks to bolster flagging economic growth. AFP PHOTO / Philippe Lopez (Photo credit should read PHILIPPE LOPEZ/AFP/Getty Images)
Chinese one-hundred yuan banknotes are arranged for a photograph in Tokyo, Japan, on Tuesday, Aug. 11, 2015. China devalued the yuan by the most in two decades, a move that rippled through global markets as policy makers stepped up efforts to support exporters and boost the role of market pricing in Asia's largest economy. Photographer: Tomohiro Ohsumi/Bloomberg via Getty Images
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"This is impacting risk assets due to the unpredictability of the Chinese central bank's action and will have a knock on deflationary impact for China's big trading partners," FXpro senior strategist Angus Campbell said.

"Companies that are reliant on revenues from China will be shunned by investors for the second day in a row," he said.

The pan-European FTSEurofirst 300 index .FTEU3 and the euro zone's blue-chip Euro STOXX 50 index .STOXX50E both fell 2.2 percent, extending Tuesday's 1.7 percent decline.

Germany's DAX .GDAXI and France's CAC 40 .FCHI underperformed, both losing 2.5 percent, as the yuan's slump hit German carmakers and European luxury goods stocks.

Britain's FTSE 100 .FTSE was down 1.8 percent while U.S. futures indicated Wall Street will open 1 percent in the red SPc1. On Tuesday, the S&P 500 .SPX shed 1 percent and the Dow Jones Industrial Average lost 1.2 percent .DJI.

YIELDS FALL

On Wednesday, the People's Bank of China (PBOC) set the yuan's midpoint rate CNY=SAEC weaker than Tuesday's closing market rate, which had already fallen sharply after China devalued its currency by nearly 2 percent in a surprise move.

The yuan's spot value CNY=CFXS fell further after Beijing released July output and investment data, losing 1.8 percent to trade at 6.4390 to the dollar. It has fallen nearly 4 percent in two days.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 2.1 percent to a two-year low. Stock markets from Australia to Singapore were a sea of red.

Emerging market currencies from Indonesia to Brazil reeled as investors feared central banks could rush to weaken their own currencies in response to China's move.

The U.S. dollar, however, failed to extend its gains against emerging market currenciesacross the board, as falling U.S. yields and Fed rate hike expectations drove it lower.

The euro rose 1 percent above $1.11 for the first time in three weeks EUR= and the dollar fell 0.5 percent against the yen - its biggest fall in over a month - to 124.40 yen JPY=.

The probability of the Federal Reserve raising U.S. interest rates next month faded to less than 50 percent from nearly 60 percent immediately after last week's solid employment data. December now looks more likely.

"While domestic data will still carry more importance, on balance the PBOC action reinforces our view of December liftoff," Goldman Sachs said in a note to clients.

The ten-year U.S. Treasury yield fell to 2.05 percent US20YT=RR, the lowest in over three months, and the strong demand for safe-haven bonds around the world pushed the 2-year German yield to a new low of minus 0.29 percent EU2YT=RR.

Commodities investors worried that prolonged yuan weakness could revive deflationary pressures, with a 19-commodity Thomson Reuters/Core Commodity CRB Index .TRJCRB holding near lows not seen since 2003.

In European trading, however, the weak dollar helped oil and copper bounce off their lows to claw back some ground, and lifted gold to a three-week high of $1,119.890 an ounce XAU=.

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