Cautious calm reigns after Washington softens trade war
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[August 07, 2019] By
LONDON (Reuters) - A cautious calm returned
to stock markets on Wednesday as softer rhetoric from Washington on the
U.S.-China trade war soothed investors, though demand for safe-haven
assets like government debt underscored lingering anxiety over recession
Europe's STOXX 600 climbed 0.9% as deal-making in the chemicals sector
also helped it claw back ground after a bruising three-day sell-off
prompted by rising tensions between Washington and Beijing.
MSCI's world equity index, which tracks shares in 47 countries, also
rose 0.2%. It had suffered its worst day in 18 months on Monday.
But gold soared to a six-year high and benchmark government debt from
Germany to the United States was in high demand as money still headed
toward safe-haven assets.
Even as relative calm returns, bond markets in particular have benefited
from fears the trade war could spark a global slowdown and bolster the
case for looser monetary policy.
U.S. shares had gained overnight after President Donald Trump downplayed
worries of a lengthy trade war and senior adviser Larry Kudlow said
Trump's administration is planning to host a Chinese delegation for
talks in September. Wall Street futures gauges also rose.
The U.S. administration's remarks marked a shift in tone from recent
days, when Beijing warned that Washington's labelling China as a
currency manipulator on Monday would have severe consequences for the
global financial order.
Still, market players voiced caution. Trump's threat to impose
additional tariffs on more Chinese products is set to take effect in
less than a month.
"There is some cautious buying creeping back in," said Michael Hewson,
chief market strategist at CMC Markets. "But if you want that to be
sustained you have to look towards September 1, when the new tariffs
kick in, and whether or not Trump presses ahead with them."
MSCI's broadest index of Asia-Pacific shares outside Japan was slightly
Also easing the mood were signs that China is intervening to steady the
yuan after its recent sharp fall, soothing investor fears of a global
The U.S. Treasury designated China a currency manipulator on Monday
after it allowed the yuan to weaken below 7 per dollar for the first
time in over a decade. The U.S. move rattled financial markets and
dimmed hopes the trade war was ending.
Since then, China's state banks have been active in the onshore yuan
forwards market, tightening dollar supply and supporting the Chinese
currency, sources told Reuters.
Despite that support, the yuan still dropped 0.2% to 7.0708 in offshore
markets, with currency markets still on edge after the People's Bank of
China (PBOC) set its official reference rate at an 11-year low..
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The London Stock Exchange Group offices are seen in the City of
London, Britain, December 29, 2017. REUTERS/Toby Melville/File Photo
"We had a little bit of recovery yesterday, but this morning we are seeing that
stalling due to the PBOC fixing the dollar-yen higher again," said Thu Lan
Nguyen, FX strategist at Commerzbank.
SAFE HAVENS IN DEMAND
The skittish mood was underlined by continuing demand for currencies and
commodities considered safe havens.
Gold touched a six-year high of $1,489.76 per ounce. The Japanese yen rose 0.2%
to 106.26, although that was still some way from levels seen on Monday when the
trade war's escalation panicked investors.
The rush to the yen was also fueled by a 2% slump in the New Zealand dollar
after its central bank made an aggressive interest rate cut and said negative
rates were possible, promoting bets on further policy easing around the world..
Central banks across the world, looking to rev up growth and fight low inflation
rates, have turned increasingly dovish in recent months.
But the extent of the Reserve Bank of New Zealand's move caught markets
off-guard, sending the Kiwi currency to its lowest level since early 2016 and
dragging the Australian dollar down 0.4% to $0.6378.
U.S. bonds stood tall, retaining much of their gains made in the past week.
Ten-year Treasury notes yielded 1.66% percent, their lowest since 2016, as
investors bet on another rate cut by the Federal Reserve in September.
Germany's 10-year bond yield fell to record lows deep in negative territory as
the bigger-than-expected Kiwi interest rate cut and weak German economic data
fueled further a rally in bond markets.
German industrial output fell more than expected in June, adding to signs that
Europe's biggest economy contracted in the second quarter as its exporters were
caught up in trade disputes.
In commodity markets, oil prices slipped to near seven-month lows, with the
potential for damage to the global economy and to dampen demand from the Sino-U.S.
trade dispute casting a shadow over the market.
International benchmark Brent crude futures were at $58.65 a barrel by 1107 GMT,
down 19 cents, or 0.5%.
For Reuters Live Markets blog on European and UK stock markets, please click on:
(Reporting by Tom Wilson; Editing by Catherine Evans)
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