Chinese Currency Devaluation Leads To Sell-Off On Wall Street - U.S. Commentary

(RTTNews) - After falling sharply in early trading, stocks have seen further downside over the course of the trading session on Tuesday. With the steep drop on the day, the major averages have offset the rally seen in the previous session.

Currently, the major averages are just off their worst levels of the day. The Dow is down 237.95 points or 1.4 percent at 17,377.22, the Nasdaq is down 66.20 points or 1.3 percent at 5,035.60 and the S&P 500 is down 23.76 points or 1.1 percent at 2,080.42.

The sell-off on Wall Street reflects a negative reaction to 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 has 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 continue to see substantial weakness in mid-day trading amid concerns about the outlook for global demand. Reflecting the weakness in the sector, the NYSE Arca Steel Index has plunged by 4.7 percent.

U.S. Steel (X) and Allegheny Technologies (ATI) are turning in two of the steel sector's worst performances, tumbling by 8.6 percent and 7.1 percent, respectively.

Significant weakness is also visible among oil service stocks, as reflected by the 2.3 percent loss being posted by the Philadelphia Oil Service Index. The weakness in the sector comes as crude oil for September delivery is slumping $1.79 to $43.17 a barrel.

Computer hardware stocks have also moved sharply lower on the day, dragging the NYSE Arca Computer Hardware Index down by 2.3 percent. Apple (AAPL) has helped to lead the sector lower, falling by 3.6 percent.

Most of the other major sectors have also come under pressure on the day, with brokerage, semiconductor 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 0.3 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 have 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, is down by 12 basis points at 2.118 percent.