China's devaluation of the yuan currency has triggered another day of losses on global stock markets. The mining sector is the biggest loser on the FTSE as analysts believe the negative effects on commodity prices will not be fully offset by any future benefits of slightly stronger Chinese economic growth.
The worrying situation adds further pressure to the mining sector and pushes down shares in a string of FTSE 350 miners and China-related funds.
In early trading on 12 August, the following stocks dominate the top fallers on the FTSE:
- Iron ore and copper miner Vedanta (VED) -4.2% to 435p
- Investment trust JP Morgan Chinese (JMC) -3.5% to 162.5p
- Diversified miner and petroleum producer BHP Billiton (BLT) -3.1% to £11.12
- Diversified miner and commodities trader Glencore (GLEN) -3% to 185.3p
- Iron ore and copper miner Rio Tinto (RIO) -2.9% to £24.80
China's currency has fallen for the second day in row as the central bank takes actions to help strengthen the economy. The lower rate against the dollar will boost China's exports. Yet market commentators believe it will trigger a currency war among other countries who may reduce the value of their own currencies in order to remain competitive.
Jefferies analyst Christopher LaFemina says China's currency devaluation is a 'clear negative' for the miners for two reasons.
'First, it increases the price of US$-denominated commodities in China, all else held equal. And second, it lowers the marginal cost of production of some commodities, including iron ore and coal.
'If this devaluation is a one-time adjustment, the impact should be small. Even if that is the case, the market is unlikely to have confidence that a further devaluation will not happen if things get worse.
'The offsetting positive of a weaker yuan may be slightly stronger Chinese economic growth, but, all things considered, we expect the market to focus on the downside risks more than the potential offsetting benefits for now.'
Macquarie says base metals were significantly hurt by Tuesday's (11 Aug) initial currency move by China. Zinc fell by 4.1% in value; nickel, copper and tin fell by more than 3%. Yet gold hit a three-week high as investors scrambled for a slice of the so-called 'safe haven' asset.
Read our analysis of the gold space and prospects for gold miners in this article.
China's currency moves come off the back of a sharp decline in its stock market in recent weeks. We explain why China's equities are experiencing a pull-back following a major rally in the latest issue of Shares. Make sure you read our feature on how to remove China worries from your portfolio.