World stock rally threatens to stall as US and EU meet to talk trade

London — A three-day worldwide stocks rally was threatening to stall on Wednesday, as investors waited for a meeting between US President Donald Trump and the president of the European Commission to see where the global trade war was heading next.

Asian stocks had edged up overnight after Wall Street had hit a five-month high, extending a month-long advance, but tech and commodity stocks in Europe eased early on as the market’s focus returned to what may happen with tariffs.

EU trade commissioner Cecilia Malmström told a Swedish newspaper on Wednesday that the bloc was preparing to introduce tariffs on $20bn of US goods if Washington imposes levies on imported cars.

A monthly survey of German business confidence also showed some effect from the spat, although there was no major plunge and traders in most markets seemed content to hold positions steady.

China’s yuan had eased off a 13-month low, which also soothed some nerves, while most major currencies, bond benchmarks and oil were tucked in tight ranges.

“We have seen a lot of complacency over this entire trade war so the question is, unless we see a very negative outcome [from the EU-US meeting], are we going to see a marked reaction?” Rabobank strategist Bas van Geffen said. “It is an odd one where two key trade partners, but also two key allies, are now fighting each other.”

With another blizzard of multinational corporate earnings, a European Central Bank (ECB) meeting, and US GDP figures still to come this week, there was plenty of scope for volatility. The dollar index, which measures the greenback against a basket of six other major currencies, was just off a two-week low at 94.506 and barely budged at $1.1692 against the euro and ¥111.24.

The yield on the 10-year US treasury note, which tends to act as the benchmark for global borrowing costs, eased to 2.937%, after climbing to a six-week peak of 2.973 percent overnight. Bond yields have been pushed up this week on speculation the Bank of Japan (BOJ) is edging closer to unwinding its aggressive stimulus programme. However, with the Thursday ECB meeting looming, most bond yields in the eurozone also edged down on Wednesday.

Talking Turkey

Britain’s pound nudged up to $1.3150 after UK Prime Minister Theresa May said on Tuesday that she would now lead negotiations on the country’s departure from the EU.

Turkey’s lira also clawed higher having sunk more than 3% on Tuesday, after its central bank shied away from raising rates in what was seen as another hit to its shredded credibility. State Street Global Advisors currency portfolio manager Aaron Hurd said the worry is that President Recep Tayyip Erdogan’s government will put pressure on the central bank to keep rates down, fueling what it already double-digit inflation.

“The new [finance] minister and the new cabinet in total is an unknown quantity and we have to wait and see and learn how to interpret their behaviours,” Hurd said. “That means an even higher risk premium priced into the currency.”

The decline in China’s yuan has also paused for the time being. The currency was a shade firmer at 6.797 to the dollar having hit a 13-month low of 6.829 this week on signs that Beijing is grabbing for the stimulus levers again. The Shanghai Composite Index closed fractionally lower after brushing a one-month high and enjoying a roughly 3% surge this week.

Tokyo’s Nikkei ended 0.5% higher, Hong Kong’s Hang Seng climbed 0.9% and, though South Korea’s KOSPI lost 0.4%, MSCI’s broadest index of Asia-Pacific shares gained 0.4%. Those moves came after Wall Street’s S&P 500 closed at its highest level since the start of February as Google’s blowout results bolstered what has already been a bumper US earnings season.

In commodities, Brent crude futures were up 0.6% at $73.89 a barrel, adding to the previous day’s gains as market focus shifted away from oversupply concerns to the possibility of increasing Chinese demand.

Copper on the London Metal Exchange (LME) traded down at $6,264 a tonne after increasing 2.7% overnight to a two-week peak of $6,328 on Chinese stimulus hopes.

Iron ore on the Dalian Commodity Exchange touched a two-month peak of 479.5 yuan a tonne, while gold was a touch higher at 1,228 an ounce.

Reuters