Trade détente bounce masks unease over Brexit and growth

LONDON (Reuters) – Stocks jumped on Tuesday as investors clung to hopes of a detente in the China-U.S. trade war and picked through the rubble of conflagrations in other top economies, with heightened uncertainty over Brexit and French protests.

A report China is moving to cut import tariffs on American-made cars drove European stocks to extend gains strongly as auto stocks jumped and the market interpreted this as a sign China is ready to make concessions on trade.

The report came after China’s Vice Premier Liu He exchanged views on the next stage of trade talks with U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer.

S&P 500 and Dow futures were up 0.8 to 1 percent, indicating a strong open on Wall Street.

Euro zone stocks rose 1.8 percent and Germany’s DAX climbed 2 percent while Britain’s FTSE 100 rose 1.6 percent. Germany’s DAX, the most China-sensitive market in Europe, last week entered bear market territory.

MSCI’s world equity index gained 0.4 percent – set for its first day of gains after a five-day losing streak. China’s blue-chip index had risen 0.5 percent overnight.

Sterling, meanwhile, still floundered near 20-month lows as the market sought clarity on the next steps for Brexit after Britain’s prime minister postponed a vote on her deal.

WHERE NEXT FOR BREXIT?

Sterling hesitantly rose 0.4 percent to $1.2610 as traders sought to price in a range of possibilities after Prime Minister Theresa May’s abrupt decision to postpone a parliamentary vote on her Brexit agreement on Monday, a move that sent the pound spiralling down to $1.2505.

Goldman Sachs analysts said volatility across UK assets has increased, with option markets pricing a wider range of outcomes including Brexit without a deal, a last-minute agreement or another referendum on EU membership.

“We still think a no deal is a very low probability, but the uncertainty will persist for some time,” said Richard Turnill, global chief investment strategist at Blackrock.

“The events of the last few days show you why there’s caution,” he added.

May embarked on the first leg of a trip to meet European leaders on Tuesday, seeking support for changes to her Brexit deal, while at home some lawmakers agitated for a vote of no confidence.

The EU was adamant the withdrawal agreement, including its most contentious element – a “backstop” for the Northern Ireland frontier – could not be renegotiated.

“I have no doubt a no-deal Brexit would rank pretty high on the list of market accidents … and have a global impact,” said Andreas Utermann, CEO of Allianz Global Investors.

FRENCH FOCUS

Bond markets were focused on France as investors fretted over fiscal spending after the government announced concessions aimed at defusing weeks of often violent protests.

President Emmanuel Macron announced wage rises for the poorest workers and tax cuts for pensioners.

This sent French bond yields to their highest level over Germany’s in 19 months, with the spread over the safe-haven German Bund hitting 48.5 basis points.

Macron’s announcement “leaves open the question about how the new fiscal measures will be covered financially,” wrote UniCredit analysts.

Olivier Dussopt, junior minister for public accounts, said on BFM TV the measures would cost 8-10 billion euros ($9.1-$11.4 billion).

(For a graphic on ‘Macron measures push France/Germany 10-year yield spread wider’ click tmsnrt.rs/2PwwJLc)

The dollar index, which measures the U.S. dollar against a basket of major currencies, slipped 0.3 percent to 97.078.

In emerging markets, stocks rose 0.4 percent from one-month lows hit on Monday.

The shock resignation of India’s central bank governor hurt India’s NSE share index initially, but it closed up 0.6 percent, helped by election results in three states which were not as poor for the ruling party as some had expected.

Oil prices rebounded strongly from earlier losses, having sunk on Monday.

U.S. crude futures climbed 1.2 percent to $51.61 and Brent futures rose 0.8 percent to $60.47.

Growth worries still stalked markets.

Japan’s economy provided the latest negative data point, contracting the most in over four years in the third quarter.

Disappointing economic data has fanned worries about corporate earnings and factory output, with the Sino-U.S. trade battle clouding the outlook for growth.

All sectors in Europe are in the red this year after oil became the last to give up all its 2018 gains, as investors licked their wounds and awaited the end of a bruising year.

(For a graphic on ‘All European sectors erase 2018 gains’ click tmsnrt.rs/2zUCdu4)

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Investors flee bonds and stocks in turbulent week for growth and trade

LONDON (Reuters) – Investors pulled billions from bonds and stocks this week as U.S. bond movements triggered fears over global growth and a trade tussle between the United States and China heated up, strategists at Bank of America Merrill Lynch said on Friday.

This week’s selloff was precipitated by the inversion of part of the U.S. yield curve, which has previously been a reliable indicator of an impending recession.

It deepened on Thursday after the chief financial officer of China’s Huawei was arrested on a U.S. request, sending markets spiraling further as investors predicted a worsening of relations between the world’s two biggest economies.

The anxiety drove investors to pull $5.2 billion from equity funds and $8.1 billion from bond funds, according to EPFR data cited by BAML.

“Markets starting to price in recession, but policymakers yet to price in recession,” argued the BAML strategists.

Equity outflows were made up of opposite flows in ETFs and mutual funds, with $5.3 billion driven into ETFs while $10.5 billion was taken out of mutual funds.

But investors were continuing to edge back into emerging market stocks, which saw their eighth week of inflows with $2.7 billion.

This helped push BAML’s “Bull & Bear” indicator of market sentiment up from 2.4 to 2.7 – “not yet an extreme bearish reading”, BAML strategists said.

The starting point for a fall to lower equity allocations is high, they pointed out, with the world’s largest sovereign wealth fund at 67 percent equity allocations.

Hedge funds are still at a net 35 to 40 percent net long, and BAML’s fund manager survey shows cash levels under 5 percent.

The global consensus forecast is for 8.3 percent growth in earnings-per-share in 2019, which the strategists said was too high, predicting a “Big Low” in markets next year.

In bond flows investors were pulling out of corporate debt and into government debt, the EPFR data showed.

Some $15 billion flowed into government bond funds over the past eight weeks, while $49 billion flowed out of investment-grade, high-yield, and emerging market debt.

In equity sectors, a building preference for value stocks over growth inverted this week, as tech had its biggest inflows in 11 weeks and financials saw heavy outflows.

Healthcare, tech, energy, and real estate saw inflows while consumer stocks, utilities, and materials saw outflows. Financials were the least preferred with investors pulling $1.3 billion from the sector.

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Battered Asia shares try to rally on talk of Fed pause

SYDNEY (Reuters) – Asian share markets tried to find their footing on Friday as speculation the Federal Reserve might be “one-and-done” with U.S. rate hikes helped salve some wounds after a punishing week.

MSCI’s broadest index of Asia-Pacific shares outside Japan nudged up 0.l3 percent, though that followed a 1.8 percent drubbing on Thursday.

Japan’s Nikkei added 0.9 percent and E-Mini futures for the S&P 500 edged up 0.1 percent.

Concerns over Sino-U.S. relations remain heightened after the arrest of smartphone maker Huawei Technologies Co Ltd Chief Financial Officer Meng Wanzhou, which threatened to chill talks on some form of trade truce. [nL1N1YA1YR]

Markets also face a test from U.S. payrolls data later in the session amid speculation the economy was heading for a tough patch after years of solid growth.

Fed Chairman Jerome Powell emphasized the strength of the labor market in remarks made late Thursday. [nL1N1YB2GD]

Economists polled by Reuters forecast jobs rose by 200,000 in November after surging 250,000 in October. [nL1N1Y91Q8]

“A view has developed of U.S. growth normalizing a little faster than expected from the fiscal ‘sugar rush’, while inflationary pressures remain contained given the sharp fall in the oil price,” said National Australia Bank economist Tapa Strickland.

“Payrolls will be very important in helping to validate whether the economy is indeed slowing faster than expected.”

The mood brightened a little after the Wall Street Journal reported Fed officials are considering whether to signal a new wait-and-see mentality after a likely rate increase at their meeting in December. [nL4N1YB5N6]

That only added to recent feverish speculation the central bank was almost done on hiking rates given concerns on global growth and the disinflationary impact of collapsing oil prices.

Interest rate futures <0#FF:> rallied hard in massive volumes with the market now pricing in less than one hike next year. A month ago they had been wagering on three increases.

The news helped Wall Street pare early steep losses and the Dow ended 0.32 percent lower, while the S&P 500 lost 0.15 percent. The Nasdaq even added 0.42 percent.

FLATTENED

Treasuries extended their blistering rally, driving 10-year yields down to a three-month trough at 2.8260 percent, before last trading at 2.8973 percent.

Yields on two-year notes fell a huge 10 basis points at one stage on Thursday and were last at 2.77 percent.

Investors also steamrolled the yield curve to its flattest in over a decade, a trend that has historically presaged economic slowdowns and even recessions.

“The sort of flattening of the yield curve that we have seen recently usually indicates that investors think the Fed is nearing the end of a tightening cycle, and that rate cuts may even be on the horizon,” argued analysts at Capital Economics.

The seismic shock spread far and wide. Yields on 10-year paper sank to the lowest in six months in Germany, almost 12 months in Canada and 16 months in Australia.

The sea change in expectations took a toll on the U.S. dollar as bulls had been counting heavily on a steady widening rate differential to propel the currency.

The greenback eased against a basket of currencies to 96.779, and fell to 112.69 yen from a 113.85 high at the start of the week. The euro was up around 0.5 percent on the week so far at $1.1376.

Cyber currency Bitcoin took another spill, sliding more than 6 percent to $3,446.17.

In commodity markets, gold firmed to near a five-month peak as the dollar eased and the threat of higher interest rates waned. Spot gold stood at $1,237.61 per ounce.

Oil was less favored, however, falling nearly 3 percent on Thursday after OPEC and its allies ended a meeting without announcing a decision to cut crude output. [nL8N1YB1II]

OPEC had tentatively agreed to cut output but was waiting for a commitment from non-OPEC heavyweight Russia before deciding volumes. [O/R]

Brent futures had ended with a loss of $1.21 at $60.67 a barrel. U.S. crude edged up 6 cents in early trade Friday to $51.55, having lost $1.31 overnight.

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Asia shares struggle to rally, oil skids further

SYDNEY (Reuters) – Asian shares fought to sustain the slimmest of recoveries on Friday amid speculation the Federal Reserve might be “one-and-done” with U.S. rate hikes, while oil fell anew as producers bickered over the details of an output cut.

MSCI’s broadest index of Asia-Pacific shares outside Japan nudged up 0.4 percent, though that followed a 1.8 percent drubbing on Thursday. Japan’s Nikkei added 0.8 percent.

Chinese shares, which were up earlier in the day, slipped into negative territory with the blue chips off 0.1 percent. E-Mini futures for the S&P 500 too started firmer but were last down 0.1 percent.

Spreadbetters, however, pointed to a strong start for Europe with London’s FTSE futures up 1.8 percent.

There was no escaping concerns over Sino-U.S. relations after the arrest of smartphone maker Huawei Technologies Co Ltd Chief Financial Officer Meng Wanzhou threatened to chill talks on some form of trade truce.

Markets also face a test from U.S. payrolls data later in the session amid speculation the economy was heading for a tough patch after years of solid growth.

Federal Reserve Chairman Jerome Powell emphasized the strength of the labor market in remarks made late Thursday.

Economists polled by Reuters forecast jobs rose by 200,000 in November after surging 250,000 in October.

“A view has developed of U.S. growth normalizing a little faster than expected from the fiscal ‘sugar rush’, while inflationary pressures remain contained given the sharp fall in the oil price,” said National Australia Bank economist Tapa Strickland.

“Payrolls will be very important in helping to validate whether the economy is indeed slowing faster than expected.”

The mood in risk-asset markets brightened a little after the Wall Street Journal reported Fed officials are considering whether to signal a new wait-and-see mentality after a likely rate increase at their meeting in December.

That only added to recent feverish speculation the central bank was almost done hiking rates given concerns about global growth and the disinflationary impact of collapsing oil prices.

Interest rate futures <0#FF:> rallied hard in massive volumes with the market now pricing in less than one hike next year. A month ago they had been wagering on three increases.

The news helped Wall Street pare steep losses and the Dow ended Thursday down 0.32 percent, while the S&P 500 lost 0.15 percent. The Nasdaq managed to advance 0.42 percent.

FLATTENED

Treasuries extended their blistering rally, driving 10-year yields down to a three-month trough at 2.8260 percent, before last trading at 2.89 percent.

Yields on two-year notes fell a huge 10 basis points at one stage on Thursday and were last at 2.76 percent.

Investors also steamrolled the yield curve to its flattest in over a decade, a trend that has historically presaged economic slowdowns and even recessions.

“The sort of flattening of the yield curve that we have seen recently usually indicates that investors think the Fed is nearing the end of a tightening cycle, and that rate cuts may even be on the horizon,” argued analysts at Capital Economics.

The seismic shock spread far and wide. Yields on 10-year paper sank to the lowest in six months in Germany, almost 12 months in Canada and 16 months in Australia.

The sea change in expectations took a toll on the U.S. dollar as bulls had been counting heavily on a steady widening rate differential to propel the currency.

The greenback eased against a basket of currencies to 96.803, and fell to 112.85 yen from a 113.85 high at the start of the week. The euro was up around 0.4 percent on the week so far at $1.1366.

Crptocurrency Bitcoin took a fresh spill to be down almost 18 percent for the week at $3,363.37.

In commodity markets, gold firmed to near a five-month peak as the dollar eased and the threat of higher interest rates waned. Spot gold stood at $1,239 per ounce.

Oil was less favored, however, falling further as OPEC delayed a decision on output cuts while awaiting support from non-OPEC heavyweight Russia.

Brent futures slipped 52 cents to $59.54 a barrel, while U.S. crude lost 40 cents to $51.09.

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U.S. stock futures fall, Asia follows after Canada arrests Huawei CFO

TOKYO (Reuters) – U.S. stock futures tumbled on Thursday and Asian markets followed after Canadian authorities arrested a top executive of Chinese tech giant Huawei Technologies, fanning fears of further tensions between China and the United States.

S&P500 e-mini futures ESc1 fell almost 2 percent at one point in thin Asian morning trade and were last were down 0.7 percent.

The Canadian Justice Department said Meng Wanzhou, deputy chair of Huawei, was arrested early this month and that she was sought for extradition by the United States.

The arrest heightened the sense of a major collision between the world’s two largest economic powers not just over tariffs but also over technological hegemony.

It also came as an inversion in the U.S. yield curve has stoked global investor worries of a possible U.S. recession.

Japan’s Nikkei .N225 slid 0.8 percent, with benchmark indexes in South Korea .KS11 and Australia down 0.6 percent and 0.2 percent, respectively.

Currencies were steadier, with major currencies little changed so far.

The euro traded flat at $1.1347 EUR= while the dollar dipped 0.1 percent against the yen to 113.01 JPY=. The yuan CNH= is also unmoved at 6.8660 in the offshore trade.

U.S. Treasuries futures TYv1 were also almost flat.

The benchmark Treasury 10-year yield US10YT=RR fell to its lowest point since mid-September on Tuesday while the five-year yield dropped below the two-year yield, causing a so-called inversion in the yield curve.

Because an inverted curve has often tended to precede a recession, investors were spooked by that.

U.S. markets were closed on Wednesday to mark the death of former President George H.W. Bush.

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World stocks soar, dollar dips, yuan up on China-U.S. trade war ceasefire

NEW YORK (Reuters) – A truce in the U.S.-China trade war boosted global stocks to their highest in roughly three weeks on Monday, while sending the dollar lower and the Chinese yuan and several trade-dependent currencies higher.

The rally in equities follows an agreement between Washington and Beijing at the G20 summit in Argentina on Saturday that calls for a 90-day trade tariff truce. Oil prices jumped more than 3 percent.

“Today is mostly about celebrating the fact that the U.S. and China have delayed what could have been the some of the worst-case scenarios regarding their trade relations,” said Michael Arone, chief investment strategist at State Street Global Advisors.

The Dow Jones Industrial Average .DJI rose 243.98 points, or 0.96 percent, to 25,782.44, the S&P 500 .SPX gained 25.02 points, or 0.91 percent, to 2,785.19 and the Nasdaq Composite .IXIC added 88.86 points, or 1.21 percent, to 7,419.40.

The pan-European STOXX 600 index rose 1.03 percent.

U.S. President Donald Trump said China has agreed to “reduce and remove” tariffs below the 40 percent level currently charged on U.S.-made vehicles. That helped boost shares of European automakers more than 3 percent .SXAP.

The White House also said the existing 10 percent tariffs on $200 billion worth of Chinese goods would be increased to 25 percent if no deal was reached within 90 days.

MSCI’s all-country world index .MIWD00000PUS climbed 0.25 percent, its sixth straight daily gain.

The U.S. dollar fell broadly as currencies battered by trade tensions staged a comeback.

“The G20, the dinner in particular, has ignited quite a robust risk rally and that’s coming at the dollar’s expense,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.China’s offshore yuan CNH= gained about 1 percent to 6.8796. The Australian dollar, viewed as a barometer of Chinese growth, was 0.5 percent higher against the greenback.

The New Zealand dollar NZD= gained 0.6 percent, while the U.S. dollar lost 0.6 percent against the Canadian dollar CAD=.

Sterling gave up early gains and dived to its lowest since the end of October as investors dumped the currency on growing concerns about British parliamentary approval for a Brexit deal.

“Until the British parliament votes on the deal next week we are going to see a steady drum beat of Brexit headlines, which is going to keep the pound weak,” Danske Bank strategist Morten Helt said. Lawmakers are to vote Dec. 11 on Prime Minister Theresa May’s agreement on leaving the European Union.

U.S. Treasury yields rose after the U.S.-China deal boosted stocks and reduced demand for safe-haven U.S. debt, but they reversed course at midday as risk appetite faded.

Germany’s 10-year government bond, the benchmark for the euro area, initially rose four basis points to 0.347 percent DE10YT=RR, then eased back to 0.3 percent.

Yields on riskier southern European bonds were down across the board. Italian bond yields hit their lowest level in just over two months on reports that Rome was negotiating a lower budget deficit with the EU and a new capital key from the European Central Bank.

Oil prices got an extra boost as Canada’s Alberta province ordered a production cut, while OPEC and allied exporting countries looked set to reduce supply.

U.S. crude oil futures settled at $52.95 per barrel, up 3.97 percent. Brent crude futures settled at $61.69 per barrel, up 3.75 percent.

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China-U.S. trade sends world stocks, emerging markets surging

LONDON (Reuters) – A truce between U.S. and Chinese leaders on trade tariffs provided boosted global markets on Monday, fuelling a nearly one percent surge on world stocks and pushing emerging currencies higher against the dollar.

European share benchmarks opened sharply higher, with Germany’s DAX .GDAXI – the most sensitive to China and trade war fears – leading the way with a 2.5 percent rise to its highest level since Nov. 14, and Wall Street too was set for a stronger session.

The gains came after China and the United States agreed at the weekend to halt additional tariffs on each other. The deal prevents their trade war escalating as the two sides try to bridge differences with fresh talks aimed at reaching a deal within 90 days.

U.S. President Donald Trump also said “China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40 percent”. That helped boost European autos more than 4 percent .SXAP.

“We have a deal. That’s wonderful news for global financial markets and signaling the start for a year-end rally in risky assets,” said Bernd Berg global macro strategist at Woodman Asset Management.

“We are going to see a rally in emerging market and U.S equities, EM currencies and China-related assets like Australia. I expect the rally to last until year-end.”

MSCI’s all-country world index .MIWD00000PUS climbed 0.9 percent in its sixth straight day of gains and hit its highest level since Nov. 9. Emerging equities .MSCIEF rose 2.1 percent and were set for their strongest day in a month.

Asian shares kicked off the gains, with Chinese mainland markets .CSI300 .SSEC rising more than 2.5 percent while Japan’s Nikkei .N225 gained as much as 1.3 percent to a six-week high.

The risk-on mood drove the U.S. dollar 0.4 percent lower against a basket of currencies .DXY while against the euro it slumped 0.6 percent EUR=EBS.

The greenback has already come under some pressure from the recent subtle shift in the U.S. Federal Reserve’s policy communication to a slightly more dovish stance. Comments by Federal Reserve Chair Jerome Powell were interpreted by markets as hinting at a slower pace of rate hikes.

Powell was scheduled to testify on Wednesday to a congressional Joint Economic Committee but his hearing is expected to be postponed to Thursday because major exchanges will be closed on Wednesday in honor of former U.S. President George H.W. Bush, who died on Saturday.

Florian Hense, economist at Berenberg, said the market rally would not bring a return to a more hawkish Fed stance.

“We would need to see some rebound in economic activity to lift expectations of more rate hikes,” he said.

The Powell comments had sent U.S. Treasury yields lower but they pulled back from the over two-month lows hit on Friday as 10-year yields rose three basis points to 3.04 percent US10YT=RR.

Germany’s 10-year government bond, the benchmark for the euro area, was set for its biggest one-day yield jump in a month, rising four basis points to a high of 0.347 percent DE10YT=RR. Yields on riskier southern European bonds fell across the board, with Italian yields down around 10 bps to new two-month lows. IT5YT=RR, IT10YT=RR.

Emerging currencies were among the main beneficiaries of dollar weakness, with an MSCI index up 0.6 percent .MIEM00000PUS. It was led by China’s yuan which rose one percent for its biggest daily gain since Feb. 2016 CNY=CFXS.

“Such positive sentiment won’t fade very soon … (the 90-day) period is not short, it’s long enough to soothe market sentiment,” said a trader at a foreign bank in Shanghai.

Elsewhere, oil soared more than five percent, a positive start after it had posted its weakest month in more than 10 years in November, losing more than 20 percent as global supply outstripped demand.

(The story fixes lead to read ‘against,’ not across)

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Chinese sneeze could give Europe Inc. a nasty flu

LONDON/MILAN (Reuters) – With sluggish growth translating into the most disappointing earnings in years, European stocks are set for a tough ride if a full blown Sino-U.S. trade war erupts following Presidents Donald Trump and Xi Jinping’s G20 dinner on Saturday.

The ongoing tariff dispute has already made the Chinese economy sneeze and given a cold to some of Europe Inc’s most iconic powerhouses due to their heavy exposure to the world’s second biggest economy.

This drag is set to continue even if Trump and Xi’s meeting ends cordially. If relations between the economic superpowers deteriorate further, the impact on many of Europe’s top firms could be profound.

Upmarket German car makers like BMW (BMWG.DE) or French luxury houses such as Hermes (HRMS.PA) have already been tagged as collateral victims of the Trump administration’s trade policy after sharp falls in their share prices this year.

With about six percent or roughly 80 billion euros of its constituents’ revenues originating from China, Germany’s DAX .GDAXi is typically used as a proxy to bet on a trade war and is lagging, with a 12.5 percent fall year-to-date, the less exposed pan-European STOXX 600 benchmark.

BMW will make 18 percent of its revenue in 2018 from the world’s second-largest economy, while Volkswagen’s share stands at 14 percent, according to Morgan Stanley.

Even if Germany, whose bilateral trade with China hit a record 188 billion euros last year, is a key concern, worries among investors are widespread.

A study conducted for Reuters by business insights platform AlphaSense shows a threefold increase in the number of times a China slowdown was mentioned during European earnings conference calls between July and September this year.

While just 16 companies in the MSCI Europe index mentioned China in the context of a slowdown between April and June, that number climbed to 49 companies, in earnings calls during the following quarter.

The mention of China, in any form or way, jumped from 361 to 540 during the same period.

If some of the underperformance of European bourses in comparison to Wall Street can be partially explained by the Trump’s administration tax cuts, many analysts believe the key lies elsewhere.

“Europe is very much exposed, being very cyclical, it’s an open economy and its stock markets already reflect that”, explained Emmanuel Cau, European equity strategist at Barclays.

“European markets are quite vulnerable to a slowdown in emerging markets, not less given the domestic dynamic which is polluted by the political problems in Italy or Brexit,” he added referring to Britain leaving the European Union and the Italian government’s tug-of-war with Brussels over its budget.

An escalation in the Sino-U.S. trade war would force Dutch asset manager NN Investments to reassess its view that European stocks are due for a comeback in 2019.

“It’s the biggest threat,” said Valentijn van Niewenhuisen, head of multi-asset at the firm.

Acknowledging slowing growth, the International Monetary Fund has lowered its growth forecast for China and since then indicators from automobile sales to e-commerce trends and production data are suggesting the world’s second biggest economy is cooling somewhat.

With creeping corporate and household debts, China is believed to have little room for maneuver for fiscal stimulus if it doesn’t want to weaken its currency, which the Trump administration believes gives it an unfair trading advantage.

Data compiled by Morgan Stanley shows how European miners are not the only ones dependent on the appetite of material hungry China.

For an interactive version of the below graphic, click here tmsnrt.rs/2QOVDqM.

CHINA SYNDROME

Aside from basic material providers, firms such as France’s fashion giant Kering (PRTP.PA), the owner of Gucci, and Switzerland’s jeweler Richemont (CFR.S) have a sales exposure of 24 percent.

Analysts at Jefferies have nicknamed the contamination of luxury stocks a reverse “China Syndrome”, in reference to a 1979 movie in which a nuclear meltdown in the United States could make its way through the Earth to China.

“It would appear that the reverse threat is now in place in the Personal Luxury Goods sector with fears of a sharp slowdown in China threatening to contaminate the entire sector starting in 2019.”

Other companies under threat are the big German industrial powerhouses such as Siemens (SIEGn.DE) or BASF (BASFn.DE).

“We’re concerned about what’s embedded in German industrials’ share prices. They embed continued profitability in China that’s very strong and continued growth and we’re skeptical that’s sustainable,” said Luiz Sauerbronn, director at U.S.-based Brandes Investment Partners, where he helps manage $30 billion.

But the reliance on the Chinese market isn’t only worrying investors.

A new strategy paper from Germany’s influential BDI industry federation calls on firms to reduce their dependence on the Chinese market.

While their presence there was once seen as a strength, it is now unsettling German politicians and industry as Beijing asserts control over the economy under President Xi Jinping.

This weekend’s G20 meeting between the leaders of the world’s top two economies will be key for market sentiment, which has been battered by the months-long trade spat.

But investors aren’t betting on an end to the dispute any time soon.

“Ultimately it’s hard to see China will be able or willing to offer enough to meet U.S. demands so things could get worse,” said Royal London senior economist Melanie Baker.

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U.S. stocks turn higher on Fed minutes; dollar recovers slightly

NEW YORK (Reuters) – Wall Street turned positive on Thursday after the U.S. Federal Reserve released minutes of its latest policy meeting, while the dollar rose and Treasury yields softened after investors digested recent comments by Fed Chair Jerome Powell.

World stocks were higher, but it was a mid-day recovery for U.S. stocks, which had sunk amid jitters over U.S.-China trade talks.

Powell said on Wednesday that U.S. interest rates were “just below” neutral, less than two months after saying rates were probably “a long way” from that point. Many investors read the remarks as signaling the Fed’s three-year tightening cycle was drawing to a close.

His comments briefly pushed the U.S. 10-year bond yield below 3 percent, its lowest since mid-September.

The yield, which had risen as high as 3.25 percent this month, inched back to 3.0334 percent.

Almost all Fed officials at the meeting agreed another interest rate increase was “likely to be warranted fairly soon,” but also opened debate on when to pause further hikes and how to relay those plans to the public.

The Dow Jones Industrial Average rose 98.22 points, or 0.39 percent, to 25,464.65, the S&P 500 gained 8.26 points, or 0.30 percent, to 2,752.05 and the Nasdaq Composite added 23.33 points, or 0.32 percent, to 7,314.93.

Other stock markets were broadly higher. MSCI’s gauge of stocks across the globe gained 0.59 percent.

In Europe, stock gains were driven by the tech, mining and autos sectors, which were worst hit by recent losses. The pan-European STOXX 600 index rose 0.20 percent.

Investors will watch a meeting at which U.S. President Donald Trump and Chinese leader Xi Jinping are expected to discuss trade at the G20 summit on Saturday.

Trump said there was “a long way to go” on tariffs with China and urged companies to build products in the United States to avoid them.

“The messaging from the U.S. over the last four weeks has been characteristically erratic,” said David Page, senior economist at AXA Investment Managers.

The dollar, which has outperformed bonds and the benchmark S&P 500 stock index this year amid rising interest rates and safe-haven flows triggered by global trade tensions, was modestly higher.

The dollar index, tracking it against a basket of six major currencies, rose 0.01 percent, with the euro up 0.17 percent to $1.1385.

Sterling was last trading at $1.278, down 0.34 percent on the day, after Bank of England Governor Mark Carney warned a disorderly Brexit could trigger a worse economic downturn for Britain than the financial crisis.

In commodities, oil prices rose after sources said Russia had accepted the need for cuts in production together with OPEC.[O/R]

U.S. crude oil futures settled at $51.45 per barrel, up $1.16 or 2.31 percent. Brent crude settled at $59.51, up 1.28 percent.

Italy’s borrowing costs slipped, with 10-year yields dipping around 2 bps.

A bond auction enjoyed much better buying interest than at last week’s deal targeting retail investors as the government has shown signs it could compromise with the European Union on its budget deficit target. [nS8N1X5053]

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Asia stocks advance, dollar struggles on signs of more cautious Fed

TOKYO (Reuters) – Asian stocks advanced on Thursday, tracking a surge on Wall Street, after the chairman of the U.S. Federal Reserve suggested it may nearing an end to its three-year rate tightening cycle, boosting interest in riskier assets.

The dollar struggled and U.S. Treasury yields dipped after Jerome Powell said on Wednesday that U.S. policy rates were “just below” neutral, less than two months after saying rates were probably “a long way” from that point.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.8 percent.

The Shanghai Composite Index edged up 0.2 percent, Australian stocks gained 0.5 percent and Japan’s Nikkei climbed 0.9 percent.

However, gains in Asia were tempered by investor jitters ahead of high-stakes trade talks between U.S. President Donald Trump and his Chinese counterpart Xi Jinping on Saturday on the sidelines of the G20 summit in Argentina.

Economists at ANZ pointed out that policy hawks in the Trump administration who want Washington to take a tough stance against Beijing appear to be in the ascendancy.

“They will want some concessions from China, not least of all on what they perceive is theft of intellectual

property and forced technology transfer,” wrote the ANZ economists.

“Thus, it would seem the prospect of the Trump-Xi meeting ending without a sustainable resolution to their differences is

relatively high.”

Analysts believe any signs of a thaw in U.S.-China tensions could trigger a knee-jerk rally but say the move would likely be short lived unless there are substantive compromise from both sides — most notably if Xi can persuade Trump to postpone a sharp tariff hike on Chinese goods due to take effect Jan. 1.

The Dow meanwhile rallied 2.5 percent and Nasdaq surged nearly 3 percent on Wednesday as Powell’s comments eased fears of a faster pace of rate hikes in 2019. [.N]

“Equities gained as Powell hinted of implementing fewer rate hikes when the economy is still doing well,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

“The likelihood of slower U.S. monetary tightening caused the dollar to slump against currencies, particularly the euro, which could soon benefit from an ECB rate hike.”

The euro was a shade higher at $1.1374 after advancing 0.7 percent the previous day.

The dollar dipped 0.2 percent to 113.46 yen after being knocked down from a two-week high above 114.00 scaled overnight.

The Australian dollar, sensitive to shifts in broader risk sentiment, jumped more than 1 percent on Wednesday and last stood little changed at 0.7302 .

The dollar index against a basket of six major currencies was effectively flat at 96.805 following an overnight loss of 0.6 percent.

The U.S. two-year Treasury yield extended a modest decline from the previous day following Powell’s comments. The yield was down about 1 basis point at 2.796 percent.

Oil prices clawed back some ground from losses in the previous session, but an increase in U.S. crude inventories and uncertainty in the run to an OPEC meeting next week kept markets under pressure. [O/R]

U.S. crude futures were up 0.8 percent at $50.66 per barrel after sliding 2.5 percent the previous day.

Brent crude rose 0.6 percent to $59.13. It has slumped 21 percent this month, during which it fell to a 13-month trough of $58.41.

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