Euro­pean shares rally, bonds fall on China's yuan as­sur­ances


Euro­pean shares ral­lied on Thurs­day af­ter China's cen­tral bank said there was no ba­sis for fur­ther yuan de­pre­ci­a­tion af­ter a de­val­u­a­tion this week that has seen the cur­rency slide around 4 per­cent.

The perkier mood in riskier as­sets soured in­vestor ap­petite for safe-haven gov­ern­ment bonds, which had ben­e­fited from a sharp sell-off in eq­uity and com­mod­ity mar­kets prompted by the de­val­u­a­tion. The Peo­ple's Bank of China (PBOC) said there was no ba­sis for more yuan de­pre­ci­a­tion in light of strong eco­nomic fun­da­men­tals, even though the yuan dropped for the third straight day.

The PBOC set its guid­ance rate CNY=SAEC at 6.4010 per dol­lar prior to the mar­ket open­ing, weaker than the pre­vi­ous fix of 6.3306. The gap be­tween the guid­ance rate and the traded spot mar­ket rate nar­rowed sharply as bank­ing sources said the PBOC had stepped up in­ter­ven­tion in a bid to sta­bi­lize prices.

Still, traders re­mained cau­tious. Sources told Reuters some pow­er­ful voices in the gov­ern­ment were push­ing for an even deeper de­val­u­a­tion to help China's strug­gling ex­porters. PBOC Vice-Gover­nor Yi Gang dis­missed such talk as ground­less, but some in the mar­ket still ex­pected that China would let the yuan slide fur­ther in the face of weak­ness in the econ­omy. "In­vestors have pounced on those re­as­sur­ances from China to push the mar­kets back up a bit. They're tak­ing the Chi­nese cen­tral bank at its word, but I'm still tak­ing those com­ments with a pinch of salt," said Han­tec Mar­kets' an­a­lyst Richard Perry.

The pan-Euro­pean FTSEurofirst in­dex of lead­ing 300 blue-chips .FTEU3 rose 1.4 per­cent to 1,537.35 with na­tional bench­mark euro zone in­dexes broadly in line with that rise. The MSCI's broad­est in­dex of Asia-Pa­cific shares out­side Ja­pan .MIAPJ0000PUS was up 0.6 per­cent, af­ter U.S. shares re­bounded overnight and two out of three main in­dexes ended in pos­i­tive ter­ri­tory. The risk-averse mood af­ter China's moves this week had height­ened the ap­peal of safe-haven gov­ern­ment debt, which then pushed down U.S. and Euro­pean bond yields. Yields on Ger­man 10-year bonds were 2 ba­sis points higher at 0.64 per­cent DE10YT=TWEB while bench­mark U.S. 10-year yields US10YT=RR were 3 bps up at 2.16 per­cent in Euro­pean trade, fol­low­ing a lack­lus­ter auc­tion on Wed­nes­day.

"The U.S. clearly needs to watch the global econ­omy and China, but ul­ti­mately, if we get a very strong re­lease to­day, mar­ket ex­pec­ta­tions for a Septem­ber in­ter­est rate hike will prob­a­bly bounce right back," said Rabobank cur­rency strate­gist Jane Fo­ley.

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