By David Gaffen
NEW YORK (Reuters) - Stocks, the U.S. dollar, and emerging market currencies around the world remained under pressure for a second day on Wednesday after China devalued its currency again, boosting the appeal of top-rated government bonds.
Germany's 2-year yield fell to a new record low of minus 0.29 percent as investors feared the deflationary pressures of a slowdown in China's economy would sap growth globally.
The prospect of a U.S. interest rate rise by the Federal Reserve next month dimmed as a result, dragging the U.S. dollar, financial stocks and U.S. Treasury yields lower. The ten-year U.S. Treasury yield fell to 2.045 percent <US20YT=RR>, the lowest in more than three months.
“China is still a big unknown, and the market is pricing in the worst,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.
On Wednesday, the People's Bank of China (PBOC) set the yuan's midpoint rate <CNY=SAEC> lower than Tuesday's closing market rate, resulting in nearly a 4.0 percent devaluation of the yuan in two days against the U.S. dollar.
The yuan's spot value <CNY=CFXS> fell further after Beijing released weak July output and investment data, trading as low as 6.4510 to the dollar.
Sources told Reuters that the move to devalue the yuan reflects a growing clamor within Chinese government circles for a devaluation of perhaps up to 10 percent to help struggling exporters.
Major stock markets lost ground worldwide, with sectors exposed to China's economy falling most, as a lower yuan makes exports to China from the rest of the world more expensive.
Luxury goods stocks like the French giant LVMH <LVMH.PA> and Coach <COH.N>, were lower, along with automakers like German carmaker BMW <BMWG.DE> which lost 2.6 percent and General Motors <GM.N> which lost 2.4 percent.
The Dow Jones industrial average <.DJI> fell 256.92 points, or 1.48 percent, to 17,145.92, the S&P 500 <.SPX> lost 29.56 points, or 1.42 percent, to 2,054.51 and the Nasdaq Composite <.IXIC> dropped 90.26 points, or 1.79 percent, to 4,946.53.
The pan-European FTSEurofirst 300 index <.FTEU3> and the euro zone's blue-chip Euro STOXX 50 index <.STOXX50E> fell 2.9 percent and 3.5 percent, respectively.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> hit a two-year low, closing down 1.75 percent.
FED RATE INCREASE QUESTIONED
The U.S. dollar weakened against most major currencies, with U.S. debt yields lower also, as investors questioned whether China's devaluation would affect the Federal Reserve's plans to raise interest rates later this year.
Short-term U.S. interest rates markets signaled traders see no more than a 40 percent chance the U.S. central bank would raise rates at its Sept. 16-17 meeting, even though the effective fed funds rate rose to 0.15 percent on Wednesday, the highest since April 2013.
“Volatility is picking up and it’s causing turmoil, it’s pushing bond yields lower and it’s casting more doubt on the Fed," said Axel Merk, president and chief investment officer of Palo Alto, California-based Merk Investments.
Banks were the weakest sector in the U.S. stock market, falling 1.9 percent, as investors scaled back bets that the U.S. Federal Reserve would boost rates this year.
The euro rose 1.4 percent above $1.11 for the first time in three weeks <EUR=> and the U.S. dollar fell 0.5 percent against the yen, its biggest fall in more than a month - to 123.91 yen <JPY=>.
Emerging market currencies from Indonesia to Brazil reeled as investors feared central banks could rush to weaken their own currencies in response to China's move.
The price of industrial commodities such as oil and copper were lower at one point, with copper hitting a 6-year low, before rebounding.
Gold rose for the fifth consecutive day, hitting a three-week high of $1,119.890 an ounce <XAU=>. The dollar's weakness lifted the price of oil, as U.S. crude rose 1.2 percent to $43.60 a barrel, while copper gained 1.3 percent to $5190 a tonne.
(Additional reporting by Saikat Chatterjee in Hong Kong, Sudip Kar-Gupta in London and Sam Forgione in New York; Editing by Louise Ireland and Clive McKeef; To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting; for the MacroScope Blog click on http://blogs.reuters.com/macroscope; for Hedge Fund Blog Hub click on http://blogs.reuters.com/hedgehub)