Stocks Close Sharply Lower On Chinese Currency Devaluation - U.S. Commentary

(RTTNews) - After moving sharply higher in the previous session, stocks showed a substantial move back to the downside during trading on Tuesday. The pullback came amid a negative reaction to news out of China.

The major averages climbed off their worst levels going into the close but remained firmly in negative territory. The Dow tumbled 212.33 points or 1.2 percent to 17,402.84, the Nasdaq plummeted 65.01 points or 1.3 percent to 5,036.79 and the S&P 500 fell 20.11 points or 1 percent to 2,084.07.

The sell-off on Wall Street came on the heels of news of the People's Bank of China's surprise move to devalue its currency.

The bank set the value of the currency, known as the yuan or renminbi, at 6.2298 versus the U.S. dollar, 1.85 percent lower than Monday's official fixing rate.

The move raised concerns about the Chinese economy as well as the possibility that it could start a currency war.

Julian Jessop, Chief Global Economist at Capital Economics, said, "Today's reduction in the daily reference rate for the renminbi has been widely interpreted as the first of many moves whose main purpose is to regain competiveness by devaluing the Chinese currency."

"This has prompted talk of a fresh round of global 'currency wars,' additional monetary easing elsewhere, and even speculation that the Fed will be slower to raise U.S. interest rates," he added. "However, we are skeptical that the PBOC's announcement is truly a game-changer."

On the U.S. economic front, the Labor Department released a report showing that labor productivity rebounded in the second quarter, although the pace of growth fell short of economist estimates.

The report said labor productivity climbed by 1.3 percent in the second quarter following a revised 1.1 percent decrease in the first quarter. Economists had expected productivity to jump by 1.6 percent.

The Labor Department also said unit labor costs rose by 0.5 percent in the second quarter after surging up by 2.3 percent in the first quarter. The increase in costs matched economist estimates.

Meanwhile, the Commerce Department released a separate report showing that wholesale inventories rose more than expected in the month of June.

Sector News

Steel stocks saw substantial weakness on the day amid concerns about the outlook for global demand. Reflecting the weakness in the sector, the NYSE Arca Steel Index plunged by 4.1 percent.

U.S. Steel (X) and Allegheny Technologies (ATI) turned in two of the steel sector's worst performances, tumbling by 8.9 percent and 6.7 percent, respectively.

Considerable weakness was also visible among computer hardware stocks, as reflected by the 2.6 percent loss posted by the NYSE Arca Computer Hardware Index. Apple (AAPL) helped lead the sector lower, falling by 5.2 percent.

Brokerage stocks also saw significant weakness on the day, resulting in a 2.2 percent loss by the NYSE Arca Broker/Dealer Index. With the drop, the index fell to a four-month closing low.

Most of the other major sectors also came under pressure on the day, with semiconductor, networking and chemical stocks seeing notable weakness.

Other Markets

In overseas trading, stocks markets across the Asia-Pacific region moved to the downside during trading on Tuesday. Japan's Nikkei 225 Index fell by 0.4 percent, while Hong Kong's Hang Seng Index edged down by 0.1 percent.

The major European markets saw more substantial weakness on the day. While the U.K.'s FTSE 100 Index dropped by 1.1 percent, the French CAC 40 Index plunged by 1.9 percent and the German DAX Index plummeted by 2.7 percent.

In the bond market, treasuries moved sharply higher in reaction to the news out of China. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, tumbled 10.1 basis points to a two-month closing low of 2.137 percent.

Looking Ahead

Amid a quiet day in terms of U.S. economic news, trading on Wednesday may be impacted by reaction to earnings news from companies such as Alibaba (BABA) and Macy's (M).