Trade war caution takes edge off stellar rally in world stocks

[November 08, 2019]  By Julien Ponthus and Dhara Ranasinghe

LONDON (Reuters) - Uncertainty about the fate of U.S./China trade talks nudged world stock markets off 21-month highs on Friday after what has proved to be stellar week for risk assets.

An agreement between the United States and China to roll back existing tariffs as part of a 'phase one' trade deal faces fierce internal opposition at the White House, sources familiar with the talks told Reuters.

After the blue-chip Dow and broader S&P 500 reached record closing highs on Thursday amid hopes of a trade war truce, U.S. stock futures pointed to a flat to slightly softer start for Wall Street shares.

Caution appeared to be the order of the day across world markets.

The pan-European STOXX 600 dipped 0.2%, nudging off more than four-year highs hit on Thursday. Asian shares retreated from six-month highs and MSCI's world stock index edged off 21-month peaks.

"The trade deal is the predominant driver", for markets at the moment said Lars Kreckel, global equity strategist at Legal & General Investment Management, noting that a dip in stock markets was a just knee-jerk reaction to the latest news on the U.S.-China front.

The mood contrasts with Thursday's surge of optimism in global markets on news Beijing and Washington had agreed to roll back tariffs as part of a first phase of a trade deal.

Worries the pact could fall apart are now prompting some investors to sell heading into the weekend.

"Perhaps we do get the phase one deal and a detente, but when we get into next year there will be big issues that both the U.S. and China have big disagreements on," said James Rossiter, head of global macro strategy at TD Securities.

"If anything, markets realize that it will take more of a formal process to get things going and make progress."

Germany's DAX, a gauge of investors' sentiment on trade, was also a touch lower on the day.

German exports posted their biggest rise in almost two years in September, data showed on Friday, providing some relief amid widespread concern that Europe's largest economy will dip into recession in the third quarter.

"Market participants are getting increasingly 'long' on good news", said Stephen Gallo, European head of FX strategy at Canadian bank BMO.

A financial trader works at their desk at CMC Markets in the City of London, Britain, April 11, 2019. REUTERS/Peter Nicholls

"The 'payback' in risk assets for a very downbeat picture earlier in the year looks unstoppable at the moment", he added.

BOND BEATING

Sovereign bond markets steadied after taking a beating this week from U.S./China trade talk optimism.

The U.S. 10-year Treasury yield stood at 1.92%, down from three-month highs hit on Thursday. Still, it is up 19 basis points this week and set for its biggest weekly rise in a month.

Safe-haven German Bund yields were also set for their biggest weekly rise in a month.

Crude oil futures meanwhile fell amid lingering uncertainty over the long-awaited trade deal and rising crude inventories in the United States.

At 1150 GMT, Brent crude was down 1.7% at $61.21 a barrel, while U.S. West Texas Intermediate crude also tumbled 1.7%, to $56.19.

In currency markets, the dollar edged up against other major currencies.

The greenback was a touch firmer at 109.40 yen, nearing a five-month high of 109.49 set the previous day.

The euro was 0.2% weaker at $1.10285, while the dollar index hovered at three-week highs.

A Reuters poll found that the dollar's persistent strength would continue well into next year.

(This story fixes typo in headline)

(Reporting by Julien Ponthus, Dhara Ranasinghe, and Sujata Rao; editing by Philippa Fletcher)

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