US stocks open sharply low after China weakens yuan

NEW YORK (BLOOMBERG, REUTERS) - U.S. stocks opened sharply lower on Wednesday after China allowed its currency to weaken further and oil prices slid to their lowest in more than 11 years.

Geopolitical concerns were also heightened after North Korea said it had tested a hydrogen bomb and Saudi Arabia cut ties with Iran.

The Dow Jones industrial average fell 159.84 points, or 0.93 per cent, to 16,998.82, the S&P 500 19.19 points, or 0.95 per cent, to 1,997.52 and the Nasdaq Composite 73.90 points, or 1.51 per cent, to 4,817.53.

"This is risk aversion right now," said Benjamin Dunn, president of Alpha Theory Advisors, which works with hedge funds overseeing about US$6 billion. "Now we're perhaps getting confirmation that China is as bad as people think. We've lost the tailwinds from the Fed and investor enthusiasm, and this adds to the mosaic of fear that's out there right now."

China's central bank set the yuan's reference rate at an unexpectedly weak level, adding to anxiety about an economic slowdown that has dominated markets this week. The S&P 500 kicked off 2016 with its worst start in 15 years. Adding to geopolitical worries, North Korea claims it successfully tested its first hydrogen bomb, which follows a recent buildup of tension between Saudi Arabia and Iran.

Commodity producers fell amid speculation that weakness in China would weigh on demand for raw materials. Brent crude oil dropped below US$35 a barrel to its lowest since 2004, while West Texas Intermediate futures lost more than 3 percent to US$34.78 as weekly U.S. data is forecast to show fuel supplies rose.

China's currency devaluation last August triggered a global rout that drove the S&P 500 to its first correction in four years, after it had reached an all-time high as recently as May. The index closed Tuesday 5.4 per cent away from its record. Now, UBS Group AG's technical strategists predict the U.S. benchmark will enter a bear market as early as this year.

Sentiment has turned more cautious on stocks after the Federal Reserve's first interest-rate increase since 2006 and forecasts for little to no growth in corporate earnings until March. Fed officials have stressed that while the pace of future hikes will be gradual, it will depend on progress in economic data.