London — World stocks steadied near three-week lows on Wednesday and Chinese markets bounced after recent sharp falls as expectations grew that policy stimulus by Beijing could temper some of the impact from an escalating China-US trade conflict.

The dollar too eased off 11-month highs against a currency basket, Wall Street looked set for a stronger opening, and MSCI’s all-country equity index snapped a five-day run of losses, rising 0.3%. Its rebound was fueled by a bounce of almost 1% in MSCI’s non-Japan Asian shares off six-and-a-half-month lows, following gains in Hong Kong, Seoul and mainland Chinese indices.

Assets perceived to be safe, such as the yen, Swiss franc and the government bonds of Germany and the US, took a step back after hefty recent rallies. "I suspect safe-havens such as bunds and treasuries could be put to the test as risk sentiment shows signs of stabilising," Commerzbank strategist Rainer Guntermann said.

One catalyst appeared to be a paper from China’s central bank which suggested cutting banks’ reserve requirement ratios (RRR), which would boost market liquidity and loosen monetary conditions. Analysts said an RRR cut appeared now to be a matter of time.

The central bank also fixed the yuan’s exchange rate a touch higher against the dollar, after the currency posted its biggest daily loss in one-and-a-half years.

However, worries of a fully fledged trade war between the two biggest world economies remain. Washington is threatening tariffs on $200bn more of Chinese goods and a White House trade adviser said Beijing was underestimating US President Donald Trump’s resolve to impose more tariffs.

An escalation in tit-for-tat tariffs would hit world growth, company profits and price stability hard at a time when several big central banks, notably the US Federal Reserve, are in policy tightening mode.

The Asian equity gains encouraged European bourses to open higher, with a pan-European index up 0.6% after slumping on Tuesday to two-month lows. However, an index of automotive shares, a sector highly vulnerable to US tariffs, stayed in negative territory.

Equity futures for New York’s S&P500 index rose 0.25% a day after US stocks fell sharply.

"At the end of the day, all these circumstances, including trade wars, have been in play for a while, and the market reacts sharply from time to time," said François Savary, chief investment officer at Swiss wealth manager Prime Partners. He cautioned, however, against pushing the equity rally too far: "The framework is set: there is monetary policy tightening, less liquidity, more geopolitical uncertainty and an economic situation which, in Europe at least, we need to be more cautious about."

Sights on central banks

As the bid for safety abated, yields on 10-year US treasury notes rose above 2.9022% after touching a two-and-a-half-week low of about 2.88%, and German yields also inched higher.

Eurozone yields have been pushed lower almost across the board this week, on the back of the trade tensions but also on slowing growth momentum across the bloc, and a central bank that has pushed back the timing of its first interest rate rise in this cycle by several months.

All this has also hit the euro, which slipped 0.2% to the dollar, staying near two-week lows of $1.1528, hit after European Central Bank (ECB) president Mario Draghi called on Tuesday for a patient approach to monetary policy. Draghi had been speaking at a banking forum in Sintra, Portugal, where he is due to appear again on Wednesday alongside US Fed chair Jerome Powell, Bank of Japan governor Haruhiko Kuroda and Reserve Bank of Australia governor Philip Lowe.

The pound, too, was struggling near a seven-month low of $1.3151 ahead of a crucial vote in parliament over the country’s EU withdrawal process.

However, as the dollar’s rally stalled, emerging currencies, such as the Mexican peso, Taiwan dollar and the South African rand, won some reprieve. ING analysts told clients, however, that "with the risk to trade firmly in place, we don’t look for a material and long-lasting rebound in higher beta and emerging-market currencies".

Commodity and crude prices rose, with Brent futures up 0.6% back above $75 a barrel before a meeting this week of the oil cartel Opec producers group. Opec member Iran has said a deal to raise oil output is unlikely.

Copper, a key barometer of world growth, rebounded from three-week lows as did other metals such as nickel and zinc.

Chinese soybean meal futures, which hit two-year highs on Tuesday on fears of curbs or tariffs on US soybean imports, slipped 0.5%.