World stocks fall and the dollar strengthens as trade war fears come back

Chinese shares, the offshore yuan and the Australian dollar all weakened. European shares were mixed as a fresh batch of positive corporate earnings offset the worries about the US-China trade conflict.

The pan-European Stoxx 600 fell 0.2% while Germany’s DAX 30 slipped 0.13%. Britain’s FTSE 100 tumbled 0.86% while France’s CAC 40 rose 0.13%.

Investors fear a trade war between Washington and Beijing could hit global growth, and prominent US business groups have condemned Trump’s aggressive tariffs. But analysts said Wednesday’s reaction remained fairly muted.

“Overall the markets’ reaction has been subdued. The markets have calmed down relatively quickly. Maybe the market is underestimating the economic impacts of the tariffs and that is why it is keeping calm,” said Thu Lan Nguyen, a currencies strategist at Commerzbank in Frankfurt.

Stronger-than-expected earnings by Apple pushed quarterly results beyond Wall Street targets on Tuesday, allaying some concerns about a tech sector shaken by recent sell-offs in Facebook, Twitter and Netflix. The tech retreat has overshadowed a generally buoyant US earnings season, with average 22.6% profit growth and 83% of companies beating consensus estimates so far.

World stocks in July recorded their best monthly returns since January, despite trade tensions, growth fears and tech selling.

Yen down

The yen continued to depreciate, falling 0.2% against the dollar to ¥112.10 as Tuesday’s pledge by the Bank of Japan (BOJ) to keep rates extremely low for an extended period continued to weigh on the Japanese currency. BOJ’s policy announcement on Tuesday to make its massive stimulus programme more flexible provided some comfort to bond investors.

Traders appeared to be putting the BOJ’s tolerance for higher yields to the test on Wednesday as the benchmark 10-year Japanese government bond yield rose to 0.12% in its biggest one-day rise in two years.

“Since the BOJ was vague about what its flexibility means, the market wants to test the bank’s pain threshold,” said Jan von Gerich, chief analyst at Nordea in Helsinki. The central bank’s policy tweaks did not appear to show any inclination from the central bank to make a radical shift from its accommodative stance.

Investors are turning their attention to other central bank decisions this week. The US Federal Reserve concludes its policy meeting on Wednesday. Markets await the Fed policy statement for signs of whether the expected two rate hikes for the remainder of 2018 can be cemented into pricing and for any change in the tone of its policy statement.

“Buying sentiment towards the dollar could receive a boost if the central bank strikes a hawkish tone,” Lukman Otunuga, research analyst at FXTM, wrote in a note. The dollar index, which tracks the greenback against a basket of six major rivals, gained 0.2% to 94.663.

In Britain, a 25 basis-point hike is now widely expected on Thursday when the Bank of England meets (BOE), despite economic weakness linked to Britain’s looming EU exit. The pound held at $1.3119, higher than a more than 10-month trough of $1.2955 touched earlier in July.

In commodities, oil prices fell on industry data showing an unexpected rise in US crude stockpiles. The slump in crude prices comes after their largest monthly decline in two years in July. US crude dipped 0.6% to $73.63 a barrel, while Brent gave up 0.8% to $73.61 a barrel.

Spot gold fell 0.1% to $1,222.99 per ounce.

Reuters