London — Hopes of a UK-EU deal over Brexit kept the British pound near five-week highs on Tuesday, helping lighten the mood in Europe even though the ongoing trade dispute between Washington and Beijing kept world stocks trading just off three-week lows.

Italy was the other bright spot in Europe, as receding concerns over public finances helped bonds extend their rally while a slight dollar retreat helped emerging-market currencies claw back some recent losses.

MSCI’s index of global equities was flat on the day, though Asian bourses were in the red for the ninth straight day as markets awaited action from US President Donald Trump after the expiry of a deadline for public comment on additional tariffs on Chinese goods.

Weakness is set to remain a recurring theme amid global trade tensions....
Lukman Otunuga, FXTM research analyst

European shares, having opened broadly higher, were down on the day, with a pan-European index of shares lower 0.3%.

The pound traded near five-week highs against the dollar, hitting a high of $1.3087, after the EU’s chief negotiator Michel Barnier said on Monday that a Brexit deal was possible within weeks. Sterling rose 0.8% on Monday.

For the second time in less than a week Barnier has signaled his desire to push ahead on the Brexit negotiations, less than seven months before the UK is slated to leave the EU on March 29 2019. The pound has been under pressure on anxiety that Britain would exit from the EU without any formal trading arrangement.

"The Barnier headlines mean there’s a lower hurdle for getting a separation deal done by the end of the year, when the discussion about the future relationship can begin," said CMC Markets analyst Michael Hewson. "Also, the fact that Trump still hasn’t announced the tariffs yet as expected has prompted a bit of cautious optimism, but it’s not a problem that’s going to go away."

Meanwhile, Italian bond yields — which move inversely to price — fell for the seventh day on Tuesday, making it the best run in more than a year for the benchmark 10-year bond, as Italian politicians signaled that an upcoming budget would likely fall within EU rules.

The closely watched Italy/Germany 10-year bond yield spread — seen as an indicator of eurozone sentiment — was at 229 basis points, as much as 60 basis points tighter than last week’s peaks. The euro also benefited from this move, rising 0.3% to $1.1628 and as much as 2.9% above the August lows.

Trade worries weigh

Earlier in the session, Asian shares struggled to avoid a ninth straight session of losses as the spectre of a further escalation in the China-US trade war haunted investors. MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.05%, but held above lows last visited in July last year.

Shanghai blue chips dipped 0.2% while South Korea fell 0.2%. Having warned last week that he was ready to levy additional taxes on practically all Chinese imports, US President Donald Trump was uncharacteristically quiet on trade on Monday.

Next week, China will ask the World Trade Organisation (WTO) for permission to impose sanctions on the US, for Washington’s non-compliance with a ruling in a dispute over US dumping duties that China initiated in 2013, a meeting agenda showed on Tuesday.

Emerging-market currencies remained under pressure with a broad index down near 16-month lows and the Indian rupee near a record trough of 72.455 to the dollar.

"Weakness is set to remain a recurring theme amid global trade tensions, a broadly stronger dollar and prospects of higher US interest rates," said Lukman Otunuga, a research analyst at broker FXTM. "With turmoil in Turkey and Argentina triggering contagion fears, appetite for emerging-market assets and currencies is likely to continue diminishing."

In commodity markets, gold was stuck at $1,195.80 an ounce and continues to move in the opposite direction to the dollar.

Oil prices found support from looming US sanctions against Iran’s petroleum industry.