Trade talk hopes and shutdown deal buoy global stocks

[February 12, 2019]  By Marc Jones

LONDON (Reuters) - World shares and bond yields rode a renewed surge in risk appetite on Tuesday, as investors were optimistic about U.S.-China trade talks and cheered Washington's deal to avoid another government shutdown.

Tokyo's Nikkei set the tone with its best day of the year so far [.T] and Europe wasted little time in trying to lift the STOXX 600 back to the two-month high it set last week.

Germany's DAX jumped more than 1.2 percent, after rising 1 percent on Monday, and Paris and Milan were up 0.8 percent, while London's FTSE approached a four-month peak despite ongoing Brexit uncertainty.

The dollar hovered at a two-month high and the Australian dollar also gained. The yen and Swiss franc dipped while U.S. Treasury and German bund yields edged up as investors jettisoned safe havens.

"We have had two bits of relatively good news overnight - optimism about the U.S. shutdown not resuming and optimism about a trade deal," said Societe Generale strategist Kit Juckes.

"Equities are higher, bond yields are a little bit higher, yen and Swiss franc weakest overnight of the major currencies so it's sort of risk-on rules OK!"

Juckes said he reckoned there was now a 75 percent chance that a ratcheting up of U.S. tariffs on Chinese goods at the start of March will be avoided and a 95 percent chance that another U.S. government shutdown will be dodged.

Those odds got a boost on Monday after U.S. lawmakers reached a tentative deal on border security funding, though aides cautioned that it did not contain the $5.7 billion President Donald Trump wants to build a wall on the Mexican border.

S&P 500 e-mini futures were up nearly 0.5 percent, pointing to a solid start on Wall Street later after a choppy day on Monday.

U.S. and Chinese officials expressed hopes the new round of talks, which began in Beijing on Monday, would bring them closer to easing their months-long trade war.

Beijing and Washington are trying to hammer out a deal before a March 1 deadline, without which U.S. tariffs on $200 billion worth of Chinese imports are scheduled to increase to 25 percent from 10 percent.

"There will be no winner in a trade war. So at some point they will likely strike a deal," said Mutsumi Kagawa, chief global strategist at Rakuten Securities in Tokyo.

A man is reflected on an electronic board showing a graph analyzing recent change of Nikkei stock index outside a brokerage in Tokyo, Japan, January 7, 2019. REUTERS/Kim Kyung-Hoon

BIG IN JAPAN

MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.3 percent.

Shanghai rose 0.35 percent, South Korea's KOSPI climbed 0.6 percent and Australian shares gained 0.3 percent.

The Nikkei rallied though, shooting up 2.6 percent after closing on Friday at its lowest level since early January. The Tokyo market was closed on Monday.

With the yen backtracking again, shares of exporters such as automakers and machinery makers led the charge. Separately, Deutsche Bank noted it was 20 years since Japan cut interest rates to zero, something now standard in large parts of Europe. [.T]

The dollar held firm, having gained for eight straight sessions against a basket of six major currencies until Monday, its longest rally in two years.

Although the Federal Reserve's dovish turn dented the dollar earlier this month, some analysts noted the U.S. currency still has the highest yield among major peers and that the Fed continues to shrink its balance sheet.

"The dollar is the market's pet currency at present regardless of whether concerns about the global economy are on the rise," currency strategists at Commerzbank said in a note.

The dollar popped up to a six-week high of 110.65 yen. In contrast, the euro dropped to as low as $1.1267, its weakest in 2-1/2 months, and last traded at $1.1277.

In commodity markets, oil prices also ticked up as traders weighed support from OPEC-led supply restraint and a slowdown in the global economy.

U.S. crude futures traded at $52.68 per barrel, up 0.5 percent. Brent crude rose 0.6 percent to $61.89 per barrel. Gold was a touch stronger at $1,312 an ounce. [GOL/]

(Additional reporting by Shinichi Saoshiro in Tokyo and Saikat Chatterjee in London; Editing by Susan Fenton)

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