UK-listed commodity and luxury goods stocks have dropped in early trading after China devalued the yuan by 1.9 per cent in a bid to combat its economic slowdown.
The move, while minor relative to typical currency devaluations, is the largest ever made by China and caught investors by surprise.
Burberry, the luxury goods business which sells in to the Chinese market, was the largest faller on the FTSE 100, dropping 2.2 per cent to £15.72.
Mining stocks also fell as investors fretted over both renewed strength in the dollar and the implication that Chinese demand is slowing.
BHP Billiton initially dropped 2.1 per cent to £11.85, while Rio Tinto fell 1.8 per cent to £25.60, though both stocks then pared losses.
China’s move also hit other markets overnight. Japan’s Nikkei reversed early gains to close 0.4 per cent lower as the yen strengthened.
Writing last week, Bestinvest head of investment strategy Ben Seager-Scott said the “very real risk” of China devaluing its currency could have a number of knock-on effects.
“Of […] concern is the potential wave of deflation that could emanate out across markets from the world’s second largest economy.
“Given how low inflation levels currently are, this could damage the global economic recovery by weakening consumer demand and increasing the real debt burden.
“Yuan devaluation could also further weaken US profitability by pushing the US dollar even higher and leaving them as the main loser in what amounts to a fresh currency war.”
