Europe close: Yuan weakness does it again, sinks oil and stocks

Another leg lower in Chinese stock markets set off a downdraft in global capital markets, with investors brushing aside largely upbeat data out of the Eurozone.

The benchmark Stoxx Europe 600 index skidded 2.21%, Germany’s DAX was 2.29% lower and France’s CAC 40 was off 1.72%.

Stocks in Asia came under pressure as the People’s Bank of China rattled investors after it guided the yuan lower again.

First thing on Thursday morning, the PBoC set the yuan’s midpoint at 6.5646 to the dollar, which was 0.5% lower than Wednesday’s fix.

“Not only was this the biggest drop between daily fixings since the 3% devaluation in August, but it is also marked the yuan’s lowest level against the US dollar for three and a half years,” explained David Morrison, market analyst at SpreadCo.

That led to share trading in China being abruptly halted less than 15 minutes into the session after the CSI300 benchmark fell more than 7%, triggering the market’s circuit breakers for the second time this week.

Later in the afternoon, Beijing announced it would suspend its new stock circuit-breaker rule – which some market participants believed was in fact making matters worse – leading to a rise in European and US equity market indices from their intra-day lows.

As of 17:21GMT Fed funds futures were pegging the chances of a March 2016 interest rate hike by the US Federal Reserve at 41% and at 63.5% for June, according to Bloomberg data.

Gold, yen up on risk aversion

As China woes intensified, basic resources – which are highly dependent on Chinese demand – tumbled, with the Stoxx 600 index for the sector down a whopping 5.29%.

Energy-related stocks were also firmly under the cosh, with the sub-index for oil and gas 2.74% lower as oil prices declined amid worries about oversupply.

West Texas Intermediate finished down by just 0.83% to $33.69 a barrel and Brent crude was 0.38% weaker at $34.11. Earlier in the day both contracts dropped below the $33 per barrel mark.

Three-month copper futures closed 1.4% lower at $4,547.50 per metric tonne in LME trading.

With investors looking for somewhere safe to park their cash, gold prices rallied. Spot gold rose for a fifth consecutive session to a two-month high of $1,106 an ounce.

The flight to safety also benefited German government bonds, with the yield on the 10-year Bund reaching its lowest level in over a month at one point in the session. Yields move inversely to prices.

However, by the end of the trading day their yield was largely unchanged as public debt markets lost their haven bid.

The Japanese yen strengthened 0.5% against the greenback as markets switched back into ‘risk-off’ mode.

Volkswagen still in the repair shop

In corporate news, beleaguered German car maker Volkswagen was in the red following a report by German newspaper Sueddeutsche Zeitung suggesting the company may have to buy back 115,000 cars in the US due to the emissions scandal.

Shares in London-listed retailer Marks and Spencer managed to swim against the tide after announcing that its chief executive Marc Bolland will step down this year.

Pandora was also in the black after the Danish jewellery retailer said it plans to open 200 to 300 stores a year between 2016 and 2018, as it reported a 40% jump in 2015 sales.

Better than expected European data

With China very much at the forefront of investors’ minds, better-than-expected readings on Eurozone unemployment and economic confidence failed to lift the mood.

The unemployment rate fell to its lowest level in November since October 2011, according to figures released by Eurostat.

It dropped to 10.5% from 10.6% in October and 11.5% in the same month of 2014, beating economists’ expectations for a rate of 10.7%.

Meanwhile, more data from the official EU data office showed Eurozone economic confidence unexpectedly improved in December.

The headline Eurozone sentiment index rose to 106.8 from the previous month's 106.1 and ahead of consensus estimates of 106.

Eurozone consumer confidence was at -5.7, up from -5.9 the previous month and estimates for the same, while the business climate indicator rose to 0.41, above November's 0.36 and forecasts for 0.39.

Retail sales figures for the euro bloc were less cheery, however, showing a seasonally-adjusted 0.3% drop in November compared with a 0.2% fall the previous month and missing expectations for a 0.2% increase.

On the year, retail sales rose 1.4% versus expectations for a 2% gain.