Picture: THINKSTOCK
Picture: THINKSTOCK

London — World shares held near one-week highs on Wednesday, supported by robust US earnings and expectations of additional stimulus from Beijing that could temper the impact of China’s simmering trade dispute with the US.

US equities now stand less than 0.5% off record highs hit in January, testifying to the strength of the world’s biggest economy and corporate sector, which has seen average earnings grow 23% in the second quarter.

The picture in the rest of the world is less rosy, given slower economic momentum and the greater vulnerability of other big economies — from China to Germany — to US trade levies. Washington is preparing to start collecting tariffs on an additional $16bn in Chinese goods. But for now many markets, especially in Asia, are supported by the US tech rally that recently saw iPhone maker Apple become the world’s first $1-trillion company.

MSCI’s index of stocks from 47 countries was marginally higher while Asian equities rose 0.3%, led by tech-heavy Taiwan. Japan’s Nikkei ticked up 0.4%. "Everyone is just focusing on US earnings … and feeling the US market will remain robust despite trade uncertainties, and that’s the main driver right now," said Christophe Barraud, a strategist at Paris-based brokerage Market Securities.

Barraud said autumn could bring a reality check in the form of slower US growth indicators, Italian politics, Britain’s Brexit negotiations with the EU, US mid-term elections and — above all — the risk of trade-war escalation.

"Support from US earnings could last until the end of August and when people are back in September they will focus more on other events … [The trade war] is not a short-term conflict about a trade deficit but a longer term story."

Indeed, support from company earnings is less evident elsewhere — a raft of weak results pushed European shares to trade just below flat. Average European second-quarter earnings growth is running at 9.9%, according to Thomson Reuters, healthy but significantly lagging behind Wall Street.

Chinese equities, meanwhile, fell 0.4% as news of the additional US tariffs overshadowed strong trade data that showed exports rose more than expected in July. A rise in imports also suggested Chinese domestic demand remains resilient. Trade fears were tempered somewhat by signs Beijing is unveiling further measures to support growth, such as increasing infrastructure spending and tweaking its monetary policy stance.

This lifted the yuan further off recent 15-month lows to the dollar. Chotaro Morita, a strategist at SMBC Nikko Securities, said Beijing’s policy support was "starting to give some support to other major markets." But he predicted the impact would be limited. "The reason they have to do so is escalating trade tensions, so you can’t expect much upside."

S&P500 equity futures indicated a flat Wall Street opening.

Brexit and sterling

While most currency markets were relatively calm, sterling came under renewed pressure, falling to 11-month lows against the euro, dollar and yen.

Its woes stem from mounting concerns that Britain could crash out of the EU without a trade deal in place, raising fears of a serious hit to the economy. With the government still far off agreeing an exit deal with Brussels, currency traders are increasingly edgy.

Market players said they were seeing increasing moves by investors to hedge sterling risks. "A lot of companies can’t wait until the [Brexit] outcome is clear… Many of them are trying to hedge against a drop in sterling," Barraud of Market Securities said.

Elsewhere the dollar’s recent mini-rally appeared to have run out of steam, offering some respite to most emerging currencies including the yuan. The Turkish lira, the biggest mover in recent days, fell another 0.7%, though it stayed well off recent record lows.

In oil markets, Brent futures held firm at about $75 a barrel as US sanctions on Iranian goods went into effect, intensifying concerns of looming crude supply shortages. Brent is up 2% this week.

Reuters