TOKYO (Reuters) - Asian stocks and commodities extended losses on Wednesday, feeling the aftershocks of China's surprise devaluation of the yuan, which hit US equities overnight and pushed down already-weak emerging currencies.
This benefitted the US dollar, which rallied even against the safe-haven yen.
What caught the equity, commodity and currency markets off balance was a boon to key government debt such as US. Treasuries, German bunds and Japanese government bonds.
Taking early cues from Wall Street's overnight slide, MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.2 perc ent to hit its lowest level since February 2014, although the decline was smaller than the previous day's 1.4 per cent slide.
Tokyo's Nikkei lost 0.3 per cent and South Korea's Kospi recovered from early losses and was flat. Australian shares dipped 0.3 per cent.
The Dow fell 1.2 per cent and the S&P 500 shed 1 per cent overnight as China's devaluation of the yuan on Tuesday (Aug 11) hit companies with large exposure to the world's second biggest economy, such as Apple and Caterpillar .
China devalued the yuan by nearly 2 per cent on Tuesday in an attempt to prop up its flagging economy. The yuan's biggest fall since 1994 hit emerging currencies from South Korea to South Africa, making the US dollar broadly sought.
The dollar stood near a two-month high of 125.21 yen brushing aside a slide in US. Treasury yields and speculation now held by some that the Federal Reserve could delay hiking interest rates in the wake of China's move. The euro hovered close to a two-week low of US$1.1089.
The Australian dollar, which tanked 1.5 per cent overnight due to its status as a liquid China proxy, limped up 0.2 per cent to US$0.7316.
Analysts pondered how investors will react to China's surprise decision once the dust begins to settle.
"The bottom line is that we believe investors will orientate portfolios towards more rate cuts rather than currency weakness. Real rates are way too high, in our view," wrote Sean Darby, chief global equity strategist at Jeffries.
Meanwhile, the devaluation by the People's Bank of China (PBOC) also raised further questions regarding the health of the Chinese economy and cooled appetite for risky assets and commodities.
US crude fell more than 4 per cent overnight to a six-year low before managing to recover 1.1 per cent to US$43.57 a barrel early on Wednesday.
Copper and aluminium also hit six-year lows on Tuesday after China devalued its currency, fuelling worries about a glut of aluminium and boosting the cost of commodities for the world's top metals consumer.
Copper posted a modest bounce after the overnight slide, with three-month copper on the London Metal Exchange (LME) edging up 0.7 per cent to US$5,159 a tonne.
The benchmark 10-year Treasury note yield declined to a two-month low of 2.114 per cent overnight before pulling back to 2.155 per cent. Its 10-year Japanese counterpart fell to a three-month trough of 0.38 per cent.