European shares drop sharply after China's yuan move spooks investors

MILAN/LONDON: European shares fell sharply on Thursday after China accelerated the depreciation of the yuan but were helped off their lows after the Chinese securities regulator said it would suspend its new stock market circuit-breaker mechanism.

The pan-European FTSEurofirst 300 index closed down 2.3 percent and the euro zone's blue-chip Euro STOXX 50 down 1.7 percent, having fallen more than 3 percent during the session.

The People's Bank of China surprised markets by setting the official mid-point rate on the yuan at 6.5646 per dollar, the lowest since March 2011.

Less than half an hour after the opening, Chinese stock markets were suspended for the rest of the day as a new circuit-breaking mechanism was tripped for the second time this week.

Baader Bank head of equity strategy, Gerhard Schwarz, said suspending the circuit-breaker was a smart move because investors were now less nervous about not being able to sell.

"In the short term it will add to the volatility but in the longer term it might actually reduce it because nobody will have to rush for an exit," he said.

Investors have expressed fears that the yuan's rapid depreciation could mean China's economy, the world's second-largest, is even weaker than had been assumed.

The sell-off sparked a surge in the Euro Stoxx 50 volatility index which rose by as much as 4 points to its highest level since mid-December.

The FTSEurofirst 300 index is down 5.4 percent so far this week, which puts it on track for the steepest decline since late August, and is down more than 17 percent from its 2015 peaks reached in April.

The worries over China hit mining stocks particularly hard, with Anglo American slumping 11 percent while Glencore fell 8.3 percent. China is the biggest consumer of metals.

Companies that export to China, such as carmakers, also fell sharply, with BMW down 3.8 percent. Financial stocks with Chinese exposure slipped too, with Standard Chartered and Aberdeen Asset Management down 1.9 and 7.8 percent respectively.

"The extent of the slowdown in China is certainly a worry. Investor sentiment is very fragile at the moment," McLaren Securities managing director, Terry Torrison, said.

Danish jewellery maker and retailer Pandora was a standout gainer, rising 4.5 percent after reporting a 40-percent rise in 2015 revenues and outlining store openings.