European shares recover, but trade worries mount

[May 16, 2019]   By Saikat Chatterjee

LONDON (Reuters) - European stocks rose half a percent to the day's highs on Thursday, erasing earlier losses, while the euro gained in volatile trade as the threat of auto tariffs were pushed back.

But falling government bond yields globally meant attention remained focused on the trade dispute between China and the United States, after Washington hit Chinese telecoms company Huawei with sanctions.

"Manufacturing growth in Europe continues to be a source of concern as seen by recent PMI data and unless we see a firm resolution on the trade war front, the uncertain outlook will continue to be a headwind for markets," said Mike Bell, a global markets strategist at JP Morgan Asset Management in London.

European shares rose half a percent, up nearly a percent from the day's lows. German stocks also surged. U.S. stock futures were up 0.4 percent, signaling a stronger start on Wall Street.

The surge in European stocks and gains by Chinese and Hong Kong stocks pushed an index of global stocks into positive territory.

German government bond yields were near their lowest in almost three years. Dutch bond yields were about to reach negative territory, a level not seen since October 2016. German yields are now four basis points below their Japanese counterparts, the biggest gap since late 2016.

Late on Wednesday, the U.S. Commerce Department said it was adding China's Huawei Technologies Co Ltd and 70 affiliates to its "Entity List" - a move that bans Huawei from acquiring components and technology from U.S. companies without government approval.

The move surprised global markets, which had steadied the day before after Reuters reported that U.S. President Donald Trump was planning to delay tariffs on auto imports.

A trader works at his desk whilst screens show market data at CMC Markets in London, Britain, January 16, 2019. REUTERS/John Sibley

RATE CUT BETS GROW

As trade tensions re-emerged, weak U.S. data ratcheted up market expectations of the Federal Reserve would cut U.S. interest rates this year. Retail sales unexpectedly fell in April and industrial production dropped 0.5%, the third decline this year.

Yields on 10-year U.S. Treasury bonds fell to 2.3%, near a 15-month low of 2.340% on March 28.

Fed funds rate futures are fully pricing in a rate cut by the end of this year and more than a 50% chance of a move by September.

"That is a sea change from a year ago, when the consensus was three to four rate hikes a year," said Akira Takei, bond fund manager at Asset Management One.

Falling U.S. yields have eroded support for the dollar, which was flat against a basket of other currencies.

Oil prices gained on concern mounting tensions in the Middle East would hitting global supplies. Brent crude rose 0.1% to $72 a barrel and U.S. West Texas Intermediate (WTI) crude reached $62.73, half a percent higher.

Gold slipped 0.2% to $1,293.9 per ounce.

(Reporting by Saikat Chatterjee; additional reporting by Hideyuki Sano and Daniel Leussink in Tokyo; editing by Larry King)

[© 2019 Thomson Reuters. All rights reserved.]

Copyright 2019 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.  Thompson Reuters is solely responsible for this content.