Europe midday: Equities fall sharply as autos, resources take a hit from China woes

LONDON (ShareCast) - (ShareCast News) - European stocks fell sharply, with autos and basic resources pacing the decline as worries about a slowdown in the world's second-largest economy gathered pace after China's central bank further devalued the yuan. At midday, the benchmark Stoxx Europe 600 was down 1.9%, France's CAC 40 was 2.4% weaker and Germany's DAX was down 2.1%.

The People's Bank of China (HKSE: 3988-OL.HK - news) cut its currency again, by another 1.6% following Tuesday's 1.9% devaluation. This was the biggest two-day lowering of the yuan against the dollar in more than two decades.

Albert Edwards, head strategist at Societe Generale (Swiss: 519928.SW - news) , said the devaluation of the yuan was "start of something big, something ugly", adding that "investors should prepare for a tidal wave of deflation from Asia".

"In some ways the question is not whether the renminbi is competitive or uncompetitive. The problem is that the renminbi is unambiguously less competitive than it was. This comes at a time when the Chinese economy is struggling and the stock market bubble is bursting," said Edwards.

"Although the PBOC said the move was a one-time adjustment to reflect changes in the way it calculates the daily fix, it also said that the price would be set 'in conjunction with demand and supply conditions in the foreign exchange market and exchange rate movements of the major currencies'. To all but the most Pollyanna-ish (optimistic) of observers that means this is the start of a major renminbi devaluation because of the massive downward market pressure the currency is under via the balance of payments deficit." In terms of sectors, export stocks with exposure to China took a beating.

The Stoxx 600 basic resources index dropped 2.3% as investors worried about a slowdown in demand from China, which is a huge consumer of metals, while the corresponding index for autos and parts fell 1.8%.

In individual stocks, luxury goods companies such as Burberry and LVMH dropped due to their exposure to China.

Shares (Berlin: DI6.BE - news) in Credit Suisse (Other OTC: CDSSF - news) fell on reports the bank has entered settlement negotiations with the New York attorney general and the Securities and Exchange Commission over allegation of wrongdoing in private trading venues.

German consumer goods company Henkel (Other OTC: HELKF - news) slumped. The company posted a 14% rise in second-quarter sales and core profit, but organic sales, which account for half of total sales, slowed in the quarter.

Shares in German utility group E.ON were flat after it reported a drop in first-half profit.

Security and outsourcing group G4S (Copenhagen: G4S.CO - news) slid after its first-half revenue figures missed expectations.

Education and publishing company Pearson (Xetra: 858266 - news) was on the back foot after saying it has agreed to sell its 50% stake in The Economist Group for £469m in cash.

Unilever (NYSE: UL - news) was under the cosh after Goldman Sachs (NYSE: GS-PB - news) downgraded the stock to 'sell' from 'neutral' and cut its price target to 2,560p from 2,820p. It said the company is negatively positioned with respect to the changes in the retail environment as the e-commerce channel grows.

While the focus was on China, a weaker-than-expected reading on Eurozone industrial production for June did nothing to lift the mood.

Official figures released on Wednesday showed industrial output in the area fell 0.4% compared with an upwardly revised 0.2% decline in May and expectations of a 0.1% drop.

.