Stocks closed lower by about 1 percent on Tuesday after an unexpected move overnight by the People’s Bank of China to depreciate the yuan by nearly 2 percent.
“The major concern is, the prospect of a China hard landing is more ominous as far as its impact on global growth,” said Eric Wiegand, senior portfolio manager at U.S. Bank’s Private Client Reserve.
The Dow Jones industrial average ended 212 points lower, wiping out most of Monday’s gains. Apple briefly plunged more than 5 percent and Caterpillar fell more than 2.5 percent to lead declines. The index’s 50-day moving average fell below its 200-day moving average, a bearish condition many analysts term a “death cross.”
On Monday, the blue-chip index snapped its first seven-day losing streak in four years with a 241-point rise.
Biotech stocks and Apple outweighed Google’s 4 percent jump to pressure the Nasdaq Composite off 1.2 percent.
Sharp declines in oil pressured the energy sector to give back much of Monday’s gains, dropping nearly 2 percent as one of the greatest decliners in the S&P 500.
Renewed concerns about a deeper slowdown in the world’s second-largest economy increased negative sentiment.
It’s the “interpretation that the U.S. dollar is going to further strengthen against the Chinese yuan and be a further headwind against U.S. multinationals,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
“I’m a little surprised (China) did this because they had plenty of room to cut interest rates,” Luschini said.
The drop in the daily peg to 6.2298 renminbi against the U.S. dollar, down from 6.1162 on Monday, was the largest one-day move in more than two decades and took the currency back to levels from three years ago. The central bank described the decision as a “one-off depreciation.”
“I think the market’s perception is if China is doing that they’re really worried about their economy,” said Jason Leinwand, managing director at Riverside Risk Advisors. “Any currencies that have direct ties with China will be weakened.”
The U.S. dollar index traded mildly higher, while the euro held above $1.10 on a bailout deal between Greece and its creditors. The yen was weaker against the dollar, near 125 yen.
European stocks closed sharply lower, with the German DAX off more than 2.5 percent, on the yuan move. Asian stocks ended mostly lower, with the Shanghai Composite flat.
“This news is negative for exporters (such as automakers) and luxury goods makers as well as other companies that derive foreign exchange revenue from China and other parts of Asia,” said Ilya Feygin, senior strategist at WallachBeth Capital.
He noted that the currency instability benefits Treasurys and gold.
Treasury yields fell as traders piled into dollar-denominated assets, with the 10-year yield briefly hitting its lowest level since June 1 before trading near 2.14 percent and the 2-year yield at 0.67 percent.
The Treasury Department auctioned $24 billion of 3-year notes at a high yield of 1.013 percent at 1:00 p.m. ET.
Gold rallied on Monday to its highest level since the end of June. Gold futures traded near $1,110 an ounce in afternoon trade.
Investors also watched Google, which unexpectedly announced after the close Monday that it will become part of a new publicly traded entity called Alphabet. Shares will still trade under the tickers GOOGL and GOOG. Class A shares jumped more than 3.5 percent in the afternoon.
Oil extended a recent decline. Brent crude was down more than 2.5 percent to below $49 a barrel, while U.S. crude briefly fell below $43 a barrel for the first time since March.
On Monday, dollar weakness and a refinery outage helped crude rally nearly 2.5 percent from a near five-month low earlier in the session
Crude oil futures hit a five-month intraday low of $42.69 and settled down $1.88, or 4.18 percent, at $43.08 a barrel, a six-year low. Gold futures ended up $3.60 at $1,107.70 an ounce.
On the data front, preliminary second quarter productivity was up at an annual rate of 1.3 percent, while unit labor costs were up 0.5 percent.
Wholesale sales rose 0.1 percent in June, the weakest since March of this year, while inventories topped expectations with a gain of 0.9 percent. May’s figure was revised lower to 0.6 percent from 0.8 percent.
“I think once investors get past the yuan devaluation we can focus on the (U.S.) economic picture, which remains good,” Luschini said.
Most analysts expect the Federal Reserve will find enough support from economic data to raise rates as early as September.
“The overnight devaluation of the Chinese yuan will likely be seen by Fed officials as a minor headwind to growth, but is not significant enough to change our base view of September liftoff,” J.P. Morgan said in a note. “The yuan has a 21.3 percent weight in the Fed’s broad dollar index, and so simply taking the 0.4 percent dollar change implied by the PBoC action at face value would imply perhaps a few hundredths off growth over the next one to two years (using a rough rule of thumb that 10% in the broad dollar subtracts about 1% off the level of GDP over time).”
Before the opening bell, Towers Watson posted quarterly results that beat expectations on both the top and bottom line.
In other earnings news, Shake Shack posted results after the close Monday that beat on both the top and bottom line. The restaurant chain also raised its full-year guidance.
Kraft Heinz reported a decline in sales at both its Kraft and Heinz divisions. Combined results for the recently merged firm were not reported.
Computer Sciences, Symantec, Cree and Cyber Ark Software will report after the bell.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded above 14.
About seven stocks declined for every three advancers on the New York Stock Exchange, with an exchange volume of 505 million and a composite volume of nearly 2.5 billion in afternoon trade.
Written by Evelyn Cheng of CNBC