World stocks edged lower Tuesday despite broad gains in Europe and rising oil prices as markets remained in the grip of trade turbulence.
A July 6 deadline is looming for Washington to impose tariffs on $34 billion worth of Chinese goods that Beijing has vowed to match with tariffs on U.S. products. President Donald Trump also threatened on Monday to “do something” if the United States was not better treated by the World Trade Organization.
Prospects of a full-blown trade war and relentless yuan weakening - it has fallen 5 percent in the past two weeks and is near 11-month lows - reportedly forced China into intervention via state-run banks.
“It is by far the biggest (yuan loss) I can remember. Prudence suggests it has to be matched across Southeast Asia because of the competitive implications,” said Bank of New York Mellon strategist Neil Mellor. “It generates a degree of instability in the market simply by virtue of its scale.”
Among equity markets, Hong Kong dived as much as 3.3 per cent to nine-month lows, hit also by U.S. curbs on China Mobile. Shanghai’s bourse hit a two-year trough but closed higher as the yuan recovered.
The mood was more cheerful in Europe where a pan-European equity index rose 1 per cent, the euro firmed and bond yields climbed after German Chancellor Angela Merkel struck a migration deal with her Bavarian conservative coalition partners.
MSCI’s gauge of stocks across the globe shed 0.01 per cent.
In Toronto, the S&P/TSX composite index was down 0.09 per cent, or 14.57 points, to 16,263.16.
Energy stocks fell 0.5 per cent, while industrials dipped 0.9 per cent.
In the United States, benchmark indices closed in the red after trading for much of the day in positive territory during a holiday-shortened session. The Dow Jones Industrial Average fell 132.36 points, or 0.54 per cent, to 24,174.82, the S&P 500 lost 13.49 points, or 0.49 per cent, to 2,713.22 and the Nasdaq Composite dropped 65.01 points, or 0.86 per cent, to 7,502.67.
Shares of Facebook Inc fell 2.3 per cent after the Washington Post reported a federal probe on a data breach linked to Cambridge Analytica had been broadened and would include more government agencies. That hit other technology shares as well.
“The big driver behind U.S. resilience is that tech has been strong,” said Rory McPherson, head of investment strategy at asset manager Psigma. “Expectations are pretty high for the earnings season, with talk of 20-per-cent earnings growth year-on-year.”
Energy stocks have been boosted by Brent crude’s rise past $78 a barrel, McPherson noted. Europe’s tech and energy sectors rose 0.5 and 1 per cent respectively .
While U.S. growth and company earnings seem unassailable, tit-for-tat tariffs from China and Europe may ultimately prove detrimental for American businesses and jobs.
U.S. bond yields rose slightly amid the easier mood but concern about the trade row has helped push the gap between two- and 10-year yields to the narrowest since 2007.
“Basically (the flat curve) is saying the underlying growth in the U.S. economy may not be as strong as the high short-term interest rates might warrant,” McPherson said.
The dollar retreated 0.4 per cent against a basket of currencies and the easing tensions in Germany helped the euro to gain 0.2 per cent against the greenback.
Friday’s monthly payrolls data should show labor markets remain tight, keeping the U.S. Federal Reserve’s policy tightening on track.
“Notwithstanding the trade war concerns, the broader picture is the U.S. central bank still remains the most hawkish central bank among its peers and that should support the dollar for now,” said Jane Foley, senior currency strategist at Rabobank.
Crude prices ended slightly higher on Tuesday after a volatile session in which the U.S. benchmark passed $75 a barrel for the first time in more than three years before turning negative and later recouping its losses.
Oil rallied early in the session on supply concerns, then slid as traders booked profits ahead of the July Fourth holiday in the United States, and bet that global supply shortages would not persist as long as expected. Crude pared its losses late in the session, turning positive on market sentiment that supply disruptions would not resolve faster than previously expected.
U.S. light crude settled up 20 cents at $74.14 a barrel, rebounding from a session low of $72.73 a barrel. In early trade, the contract rose to $75.27, a 3-1/2-year high.
Brent crude was up 46 cents at $77.76 a barrel, after trading as low as $76.67 and as high as $78.85.
The early gains came after Iran appeared to threaten to disrupt oil shipments from the Middle East Gulf if Washington pressed ahead with sanctions. U.S. crude rose above $75 a barrel for the first time since 2014.
Prices retreated as some thought talk of supply disruptions might be overblown, said Gene McGillian, vice president of market research at Tradition Energy in Stamford, Connecticut. He also said traders could be moving to liquidate bullish positions.
Pressure to liquidate may have accelerated ahead of the U.S. holiday on Wednesday, said Tariq Zahir, managing member at Tyche Capital in New York.
Traders said supply disruptions could be short lived as OPEC and allied producers ramp up output.