By Marc Jones
LONDON (Reuters) – A rout in global markets eased on Tuesday as China kept the yuan on a tight leash after its landmark drop past 7 to the dollar led the United States to label Beijing a currency manipulator.
The trade war between the world’s top economies remained close to boiling point, but the heat was reduced enough to steady some nerves when China’s central bank fixed the yuan at a slightly stronger rate [.EU].
Asian markets held losses to between 0.75% and 1.5% overnight. Some encouraging German data helped Europe gain. Futures were pointing to a 1% rebound after Wall Street suffered its heaviest fall of the year on Monday.[.EU]
Safe-haven assets, including bonds, gold and currencies like the yen and Swiss franc, settled down as investors moved tentatively back into the euro, pound and some of emerging- market currencies.
The mood was still fragile, though.
“I think the tipping point for a more prolonged negative trend (for risk assets) is quite close,” said Hans Peterson, SEB Investment Management’s head of asset allocation, referring to the trade war escalation and other risks such as Brexit.
“We have reduced both European and global equities. We still have a small overweight in EM (emerging market) stocks but just a small one.”
U.S. President Donald Trump and Treasury Secretary Steven Mnuchin said on Monday that China was manipulating its currency, and that Washington would engage the International Monetary Fund to clamp down on Beijing.
“Officially labeling China a currency manipulator gives the United States a legitimate reason to take even more steps,” said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
“The markets are now scrambling to factor in the possibility of the United States imposing not only an additional 10% of tariffs on Chinese imports, but the figure being raised to 25%.
Goldman Sachs also said it no longer expects a deal to be struck before the November 2020 U.S. presidential election. Morgan Stanley said more tit-for-tat tariffs could tip the world economy into recession by the middle next year.
Though U.S. Treasury yields had edged back up to 1.74% from October 2016 lows of 1.672%, German yields stayed down at -0.54%. Markets are now pricing in a 100% chance that the European Central Bank will cut its already negative interest rates again next month. [ECBWATCH]
YUAN TO WATCH
MSCI’s broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> had ended down 0.75% after brushing its lowest since January. It has lost 3.7% so far this week.
The Shanghai Composite Index <.SSEC> retreated 1.4%, while Japan’s Nikkei <.N225> shed 0.7%. Australian stocks <.AXJO> fell 2.4% after metals prices fell and Australia’s central bank resisted cutting interest rates again.
China’s offshore yuan had stretched the previous day’s slide, briefly weakening to 7.1382
The Japanese yen, a perceived safe-haven in times of market turmoil and political tensions, touched a seven-month high of 105.520 per dollar
The Swiss franc, another currency sought in times of turmoil, has gained roughly 1% against the dollar this week. It set a six-week peak of 0.9700 franc per dollar
Japan’s 10-year bond yield
Brent crude oil futures
“People are just rebalancing their portfolios in favor of bonds, gold, Japanese yen, Swiss francs and the usual safe havens,” said SP Angel analyst Sergey Raevskiy.
(GRAPHIC – Onshore Chinese yuan: https://tmsnrt.rs/2MFqXZS)
(Additional reporting by Shinichi Saoshiro in Tokyo and K. Sathya Narayanan in Bengaluru; sditing by Larry King)