Cautious calm reigns after US softens its trade war rhetoric

Oil slumps to new seven-month low

LONDON, Aug 7, (RTRS): A cautious calm returned to stock markets on Wednesday as softer rhetoric from Washington on the US-China trade war soothed investors, though demand for safe-haven assets like government debt underscored lingering anxiety over recession risks.

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 towards safe-haven assets.

MSCI’s broadest index of Asia-Pacific shares outside Japan was slightly lower.

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 currency war.

The US 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 US 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..

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.

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.

US 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 fuelled further a rally in bond markets.

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-US 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%.

US

US stocks tumbled in early trading Wednesday as central banks around the world cut interest rates and increased fears that global growth is being crimped by the US-China trade war.

Every major US index fell in the early going, putting stocks back on a course for losses after briefly breaking a six-day losing streak on Tuesday. Investors were back in defensive mode headed for relatively safe holdings.

Banks sustained some of the worst losses as bond yields fell sharply. Lower bond yields mean lower interest rates on mortgages and other kinds of loans, which mean lower profits for banks. JPMorgan Chase fell 3.2% and Bank of America fell 3.6%.

The dimming expectations for global growth also send the price of crude oil sharply lower. Benchmark US crude was down 3% at $52 a barrel. That helped pull energy sector stocks lower. Occidental Petroleum gave up 3.1%.

Big technology stocks, longtime investor favorites, also posted hefty losses. IBM lost 2%.

The S&P 500 index fell 1.1% as of 10:16 a.m. Eastern time. The Dow Jones Industrial Average fell 352 points, or 1.4%, to 25,509. It was down as much as 589 earlier. The Nasdaq fell 0.6% A key gauge of fear in the marketplace surged 13.7%. The VIX index, which measures how much traders are paying to protect themselves from swings in the S&P 500, was still below where it was at the start of the year, when recession fears were surging, but it’s close to its highest level of the year.

UK

London’s FTSE 100 gained on Wednesday after a run of six losing sessions triggered by worries over the US-China trade dispute, though poor earnings for global commodities trader Glencore and a handful of other companies limited gains.

The blue-chip FTSE 100 added 0.5%, supported by broad gains in shares of heavyweight constituents such as Shell , healthcare firms AstraZeneca and GlaxoSmithKline as well as HSBC.

However, commodities trader Glencore weighed as it fell 2.5% and hit a near three-year low after an almost onethird drop in core profit.

The mid-cap FTSE 250 rose 0.6% by 0748 GMT, helped by a post-earnings jump in Ultra Electronic and infrastructure products maker Hill & Smith.

The FTSE 100 has tumbled more than 5% in just a week, after having gained in six of the first seven months of the year, following President Donald Trump’s threat to slap a 10% tariff on a further $300 billion in Chinese imports next month.

Europe

European shares rose on Wednesday after three days of falls, as deal-making activity in the German chemical sector helped offset losses from London-listed mining majors, with U.S.-China trade worries lingering.

German chemical groups Bayer and Lanxess agreed a $3.9 billion deal to sell chemical park operator Currenta to Macquarie Infrastructure and Real Assets (MIRA), sending shares in both European companies 2-4%higher

That drove a more than 1% rise in the sub-index of chemical industry companies and helped the pan-European STOXX 600 index gain 0.3% after a volatile session on Tuesday after the latest exchanges between Beijing and Washington.

The White House gave assurances late on Tuesday that it wants to press ahead with negotiations and that helped Germany’s export-heavy DAX index outperform, shrugging off dire domestic industrial output data for June.

London’s FTSE 100, stacked with mining companies whose biggest global client is China, lagged as commodities trader and producer Glencore Plc sank on a 32% drop in first-half core profit.

Banks overturned earlier losses to rise 0.3% as a sharp rise in net profit at Italian lender Banco BPM put its shares on track for their best day in over a month.

Italy’s biggest bank, UniCredit, however, lagged after it cut its revenue target for 2019 due to expectations interest rates would remain lower for longer.

Asia

Asian shares were mixed Wednesday as markets calmed after China’s decision to stabilize its currency.

Japan’s benchmark Nikkei 225 lost 0.2% to 20,543.35 in afternoon trading. Australia’s S&P/ASX 200 added 0.7% to 6,521.40. South Korea’ Kospi slipped 0.2% to 1,914.65. Hong Kong’s Hang Seng dipped nearly 0.1% to 25,955.27, while the Shanghai Composite added 0.2% to 2,782.63.

Wall Street regained its footing a day after its biggest decline in a year, which had been set off by news that China allowed its currency to depreciate against the dollar to its lowest level in 11 years.

The S&P 500 index rose 37.03 points, or 1.3%, to 2,881.77. The index dropped 3% on Monday, its worst loss since December. The Dow climbed 311.78 points, or 1.2%, to 26,029.52. The Nasdaq composite gained 107.23 points, or 1.4%, to 7,833.27. The Russell 2000 index of smaller companies picked up 14.67 points, or 1%, to 1,502.09.

Global investors have grown nervous lately about the possible impact that a trade war between the U.S. and China could have on the economy and corporate profits.

But China’s decision to allow its currency to stabilize Tuesday suggests Beijing might hold off from aggressively allowing the yuan to weaken as a way to respond to US tariffs on Chinese goods.

Oil

Oil prices fell further on Wednesday, extending recent heavy losses as deepening US-China trade tensions weighed on the outlook for the global economy and energy demand.

Brent crude futures were down $1.04, or 1.75%, at $57.90 a barrel by 1251 GMT, setting a fresh seven-month low. Prices have lost more than 20% since hitting their 2019 peak in April.

US West Texas Intermediate (WTI) crude futures were down $1.17, or 2.18%, at $52.46.

Brent has plunged more than 10% over the past week after US President Donald Trump said he would slap a 10% tariff on a further $300 billion in Chinese imports from Sept 1, sending global equity markets into a tailspin.

Elsewhere, data indicating a largerthan-expected drop in US crude stocks offered some support to oil prices after several weeks of large draws on inventories.

Official data from the government’s Energy Information Administration (EIA) is due on Wednesday.

The EIA on Tuesday lowered its domestic oil growth forecasts for the year after Hurricane Barry disrupted Gulf of Mexico output in July. Production is set to rise by 1.28 million barrels per day to 12.27 million bpd this year.

Currencies

Safe haven currencies the Japanese yen and Swiss franc gained on Wednesday after New Zealand’s central bank cut interest rates by more than expected,feeding concerns about the weak global economy. The Reserve Bank of New Zealand cut its official cash rate to a record low of 1% and flagged the possibility of using negative rates to stimulate the economy, sending its currency to 3-1/2 year lows. The New Zealand dollar was last down 1.47% at $0.6427, bouncing off the session low of $0.6379. The Aussie fell 0.49% to $0.6725 as markets ramped up bets that Australia would cut rates faster and deeper than expected. The session low for the Australian dollar was $0.6678, the lowest since early 2009. The Japanese yen gained 0.66% to 105.74 against the greenback, nearing an eight-month high of 105.51 reached on Tuesday. The Swiss franc gained 0.37% to 0.9727 against the US currency. On Monday, China responded by allowing its currency to weaken past 7 per dollar for the first time since 2008, and Washington labeled Beijing a currency manipulator. The yuan weakened on Wednesday, but held above an 11-yearlow reached the previous session, before Beijing appeared to take steps to stabilize the currency.