By William Watts, MarketWatch
China’s yuan currency tumbled Monday, breaching a level long described by market watchers as a “line in the sand” and feeding fears of an intensifying China-U.S. trade war. In turn, that sparked a global equity-market selloff that saw U.S. stocks suffer their biggest one-day decline of 2019.
Why are investors rattled, and how concerned should they really be? Here’s what you need to know:
China’s currency weakened early Monday, trading at more than 7 yuan per U.S. dollar for the first time in more than a decade. In offshore trading, the yuan /zigman2/quotes/210561989/realtime/sampled USDCNH +0.1340% sank to a record low of more than 7.10 yuan per dollar, according to The Wall Street Journal . In recent offshore action, the yuan traded at 7.0949 per dollar, after having changing hands at 7.0507 in onshore trading /zigman2/quotes/210561991/realtime/sampled USDCNY +0.1254% .
The move came after the People’s Bank of China set its daily reference rate at more than 6.9 yuan per dollar for the first time since December. In onshore trading, the yuan is allowed to trade in a band that can fluctuate 2% on either side of the reference rate.
Why did stocks sell off?
While economists and traders debated whether the yuan weakness signaled a willingness by Beijing to use the yuan as a weapon in the trade war, investors fled stocks and other assets perceived as risky as the outlook for a deal between the U.S. and China suffered a heavy blow.
Wall Street joined in a global selloff, with stocks extending sharp losses in afternoon trade. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.48% fell more than 900 points at its session low before ending the day down 767.27 points, or 2.9%, while the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.21% suffered a 3% fall. The tech-heavy Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +1.04% slumped 3.5% as China-sensitive stocks took a hit.
There had been a “curious tendency” in the markets to think that both China and the U.S. wanted and needed a deal and that the desire to put one in place would soon lead to an agreement, said Paul Christopher, head of global market strategy for Wells Fargo Investment Institute.
“We think China’s moves today signal that they are prepared to use a variety of measures and push these negotiations well into 2020,” Christopher said, in a phone interview. “There’s not going to be an easy deal here for the U.S.”
The weakening yuan, meanwhile, also stirred memories of a messy 2015 devaluation of the currency that sent shock waves through global financial markets over several months, he said.