* Yuan sees biggest drop in almost three years after PBOC
* Contrasts with world stocks at 6-year high; Wall St opens
* Gold holds recent gains, major currencies rangebound
By Marc Jones
LONDON, Feb 25 The repatriation of investors'
cash into developed markets was underscored on Tuesday as Wall
Street opened at an all-time high after China's yuan suffered
its worst day in over three years.
Wall Street started steadily after Monday's
record high as confidence in the United States and Europe helped
cool markets after the yuan's plunge and a sharp drop in Beijing
and a number of other emerging market bourses.
Uncertainty over China is stoking worries about a
faster-than-projected slowdown in its massive economy and is
dovetailing with political worries in other big emerging markets
like Ukraine, Thailand, Nigeria and Turkey.
The U.S. Federal Reserve has also started to scale back its
It's a potent mix that has seen a hefty $38 billion pulled
out of emerging markets over the last 17 weeks and $44.2 billion
stuffed into developed market equity funds since the start of
The moves have been reinforced by Wall Street's recent run
and Ramin Nakisa, a global macro strategist at UBS, said the
contrast with sliding emerging markets underscored their limited
appeal in the current difficult environment.
"We think there will be further flows into the U.S. as the
Fed cuts back on its stimulus," he said. "If you could earn
3-3.5 percent on U.S. Treasuries for example would you risk
money in volatile emerging market debt for a small premium."
The yuan has entered a dramatic weakening cycle
in recent weeks, guided by a series of moves by the central bank
aimed at instilling caution into those who for years have been
betting on its rise versus other major currencies.
Tuesday saw a significant acceleration in the move. The
yuan's sharpest drop since November 2010 extended its fall in
the past week to just over 1 percent, amid talk the People's
Bank of China (PBOC) had been discreetly intervening in the spot
China allows the yuan to move 1 percent above or below a
midpoint set daily but experts believe the recent depreciation
is intended to set the stage for a widening of that band to 2
percent or more this year to make it more free moving.
"A lot of people were assuming the yuan would continue to
strengthen... so what has happened over the last week has left a
lot of people blindsided," said UBS's Nakisa. "We expect to see
more volatility in emerging markets in the rest of the year."
CRUISING AT ALTITUDE
MSCI's all world index, which tracks stocks
in 45 countries, was in positive territory for the 13th session
in 15 as it sat at a six-year high.
In Europe, the urge to take profits after seven straight
sessions of gains was strong and the pan-regional FTSEurofirst
300 sagged 0.4 percent, led by a 1 percent drop from
London's FTSE due to its prevalence of China-influenced
The euro and benchmark German government bonds
kept to tight recent ranges and there was little
impact from new European Commission forecasts which slightly
increased its growth estimate for the euro zone to 1.2 percent
in 2014, with a further 1.8 percent expansion next year.
Inflation was seen at 1 percent this year and 1.3 percent in
2015, still well short of the European Central Bank's target of
just below 2 percent. The ECB meets early next month and will be
armed with its own in-house forecasts.
Goldman Sachs pushed back on Tuesday its prediction of a
rate cut until April, although it didn't rule out a move by the
ECB to keep money market liquidity topped up by ending its
weekly 'sterilisation' of past government bond purchases.
"It will be a big step for the ECB but a small step for
mankind," said Neil Williams, chief economist at fund manager
WALL STREET HIGH
Away from China, Japan's Nikkei bolted ahead by 1.4
percent to breach the 15,000 barrier, which in turn gave the
dollar a slight lift on the yen, although it later sagged.
It had followed in the footsteps of Wall Street, where the
benchmark S&P 500 hit an intra-day record on Monday as the
Nasdaq punched to peaks last seen almost 14 years ago.
Another data deluge is due, including confidence readings,
housing market surveys and retail sales figures, while
stocks are likely to remain on alert after Monday's fresh flurry
of merger and acquisition activity.
U.S. Treasuries prices, which provide the benchmark for
global borrowing costs, were steady after a dip overnight, with
yields on the benchmark 10-year note holding just
below 2.74 percent in early U.S. trade.
The swinging risk sentiment continued to buffet emerging
markets. The latest twist in a government corruption scandal in
Turkey saw the lira hit two-week lows versus the dollar and
stocks fell 3 percent.
Ukraine fared better, with its sovereign dollar bonds
keeping most of Monday's stellar gains as hopes grew it would
receive Western aid to prevent a debt default after the ousting
of president Viktor Yanukovich.
Gold, which has benefited from recent global
uncertainty, was also firm at around $1,333 an ounce after
touching a four-month high. It faces stiff resistance at
October's peak of $1,361.60.
Copper fell for a second day on concern about the impact of
slower growth in China while oil prices faded just a little to
leave Brent crude at $110.30 a barrel and U.S. oil at
$101.24 a barrel.