Cautious calm returns as White House softens trade war rhetoric
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[August 07, 2019]
By Tom Wilson
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 underscored lingering anxiety.
Europe's STOXX 600 climbed 0.7%, recovering from a three-day sell-off as
investors fled after an escalation in the trade war. MSCI's world equity
index, which tracks shares in 47 countries, rose 0.2%.
But gold, the Japanese yen and government debt remained in high demand
as investors remained wary of riskier assets.
U.S. shares 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 labeling China as a currency
manipulator on Monday would have severe consequences for the global
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, allaying 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.
The yuan still dropped 0.2% to 7.0708 in offshore markets despite the
support. The People's Bank of China (PBOC) set its official reference
rate at an 11-year low, keeping currency markets on edge.
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Flags of U.S. and China are displayed at American International
Chamber of Commerce (AICC)'s booth during China International Fair
for Trade in Services in Beijing, China, May 28, 2019. REUTERS/Jason
"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. "It has
caused markets to again be in a bit of a risk-off mode."
SAFE HAVENS IN DEMAND
The skittish mood was underlined by continuing demand for currencies
and commodities considered safe havens.
Gold reached a six-year high of $1,489.76 per ounce. The Japanese
yen rose 0.2% to 106.27, although that was still some way from
levels seen on Monday when the trade war's escalation panicked
U.S. bonds have also retained 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.
Fixed income markets have benefited from fears the U.S-China trade
war would raise the risk of a global recession, strengthening the
case for policy easing by central banks.
Germany's 10-year bond yield fell to record lows deep in negative
territory as a bigger-than-expected interest rate cut in New Zealand
and weak German data gave further impetus to a rally in bond
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, with the potential for
damage to the global economy and to fuel demand from the Sino-U.S.
trade dispute casting a shadow over the market.
International benchmark Brent crude futures were at $58.79 a barrel
by 0759 GMT, down 14 cents, or 0.05%, and trading near seven-month
(Reporting by Tom Wilson)
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