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 two-year yield fell to a fresh record low of -0.29 per cent 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 US interest rate hike next month dimmed too, which dragged the dollar and US Treasury yields lower. The flip side of that was the fifth consecutive rise in gold prices to a three-week high.
"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 and the euro zone's blue-chip Euro STOXX 50 index both fell 2.2 per cent, extending Tuesday's 1.7 per cent decline.
Germany's DAX and France's CAC 40 underperformed, both losing 2.5 per cent, as the yuan's slump hit German carmakers and European luxury goods stocks.
Britain's FTSE 100 was down 1.8 percent, while US futures indicated Wall Street will open 1 per cent in the red. On Tuesday, the S&P 500 had shed 1 per cent and the Dow Jones Industrial Average lost 1.2 per cent.
Yields fall
On Wednesday, the People's Bank of China (PBOC) set the yuan's midpoint rate weaker than Tuesday's closing market rate, which had already fallen sharply after China devalued its currency by nearly 2 per cent in a surprise move.
The yuan's spot value fell further after Beijing released July output and investment data, losing 1.8 per cent to trade at 6.4390 to the dollar. It has fallen nearly 4 per cent in two days.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 2.1 per cent 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 US dollar, however, failed to extend its gains against emerging market currencies across the board, as falling US yields and Fed rate hike expectations drove it lower.
The euro rose 1 per cent above $1.11 for the first time in three weeks and the dollar fell 0.5 per cent against the yen - its biggest fall in over a month - to 124.40 yen.
Fed rate hike timing
The probability of the Federal Reserve raising US interest rates next month faded to less than 50 per cent from nearly 60 per cent 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 US Treasury yield fell to 2.05 per cent, 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 per cent.
Commodities investors worried that prolonged yuan weakness could revive deflationary pressures, with a 19-commodity Thomson Reuters/Core Commodity CRB Index 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.