Pound drops to five-year low, markets off sharply after yuan weakens for second day

A second consecutive day of weakness in China’s currency saw another wave of risk aversion sweep over all asset classes, with commodities and equities bearing the brunt of selling and the pound moving to five-year lows following remarks by the Chancellor.

As of 14:06 GMT, front month Brent crude futures were changing hands 2.89% beneath Wednesday’s closing value of $33.27 per barrel on the ICE - at 11-year lows - while the Footsie was down by 150.21 points or 2.48% to 5,923.25.

The DJ Stoxx 600 Basic Resources company sub-index was losing 5.53% and the Oil&Gas sub-index another 4.56%.

On the other side of the Pond, the Dow Jones Industrials and S&P 500 would start the session with losses of about 1.7% in each, with all of the components in the former in the red and technology issues at the bottom of the pile.

Although continued slowing in the Chinese economy had already been factored into most forecasts for 2016 the pace of depreciation in the country’s currency, the Yuan, appeared not to be.

The start of the New Year might also be making it easier for many investors to re-adjust their portfolio positions.

After just 30 minutes of trading on Thursday, the Shanghai Stock Exchange Composite index sank 7.04% to 3,125 points.

Nevertheless, even seasoned market veterans such as billionaire investor George Soros warned of an impending financial crisis akin to the crash of 2008, Bloomberg reported.

Risk aversion was also evident in foreign exchange markets, with the dollar/yen slipping 0.67% to 117.81 while euro/dollar gained 0.67% to 1.0860 – its largest advance in a month.

Sterling was being quoted at 1.4550 versus the US dollar, its lowest level in five years and down by 0.44% on the day.

In remarks to business leaders in Cardiff George Osborne said that: "last year was the worst for global growth since the [financial] crash and this year opens with a dangerous cocktail of new threats."

The flip-side of the above was haven buying in sovereign debt. However, come the afternoon the benchmark 10-year Gilt had reversed earlier gains, with yields flat at 1.79% after plumbing an intra-day low just above 1.73%.

US Treasury notes of a similar maturity were similarly little changed, with their yield at 2.16%.

Despite the volatility in global financial markets, in a speech delivered to the Chamber of Commerce in Raleigh, North Carolina, Richmond Fed president Jeffrey Lacker said that consumer price inflation in the US will reach the central bank’s target in the “near-term”.

Gold futures for delivery in February were up for a fifth consecutive session on Thursday, rising 1.05% to $1,103.10 per ounce in COMEX trading.

Despite all of the above, the Chicago Board Options Exchange volatility index - which many traders label the market's fear gauge - was only higher by 6.46% to 20.59 points as of 1414 GMT.