TORONTO -- North American stock markets suffered steep early declines again Wednesday in response to another big drop in the value of China's currency, but largely recovered by the close with U.S. indexes ending the day flat to slightly positive.
The latest move by Beijing sent the yuan down 1.8 per cent Wednesday morning on top of a 1.9 per cent decline Tuesday. That left traders concerned about the true state of China's economy, the world's second largest after the United States.
However, Brian Belski, chief investment strategist at BMO Capital Markets, said investors shouldn't be surprised by the troubles in China.
"It's not like we didn't know China was having problems," Belski said, pointing to weakness in commodities and a slowdown in the country's pace of growth as the sources of volatility. "China is in the early stages of growing slower, growing more stable, after much more violent and aggressive growth."
The S&P/TSX composite index was down more than 230 points around midday, but clawed back most of that to finish 75.14 points in the red at 14,339.53.
New York markets also registered steep declines earlier in the day before making an almost complete recovery, something they failed to do when the first Chinese currency shock hit markets on Tuesday.
The Dow Jones industrial average closed down just 0.33 of a point at 17,402.51, while the Nasdaq gained 7.6 points to 5,044.39 and the S&P 500 climbed 1.98 points to 2,086.05.
Belski says the dramatic early declines were an overreaction.
"All that investors know how to do is overreact," he said. "They don't know how to invest anymore."
The loonie, one of the casualties of the previous day's route, rebounded on Wednesday, gaining 0.77 of a U.S. cent to 77.08 cents US.
On commodity markets, the September crude contract rose 22 cents to US$43.30 a barrel and September natural gas climbed 8.7 cents to US$2.931 per thousand cubic feet.
Meanwhile, the contract for December gold, a commodity often seen as a safe haven in times of economic turmoil, rose $15.90 to US$1,123.60 an ounce.
China's government said its moves were attempts to make its exchange rate more responsive to the market. But a cheaper yuan also benefits China by making exports less expensive to overseas customers. Many investors considered the devaluation a sign that the country's economic growth is much worse than official reports suggest.
Going forward, Belski said investors should look to North America -- rather than China or emerging markets -- for economic growth.
"Investors have to come to grips with the fundamental fact that North American growth will set and define global growth for the next five to 10 years -- principally led by the U.S., but Canada's going to come along for the ride."
