Picture: 123RF/BLUE BAY
Picture: 123RF/BLUE BAY

London — Europe’s markets endured some weakness on Tuesday, as traders cashed in on recent record highs and waited for a long-awaited US-China trade deal and the first flurries of the Wall Street earnings season.

It had been smooth sailing in Asia. MSCI’s world stocks index set a new record high after reassuring Chinese data and Washington saying it no longer deemed Beijing a currency manipulator, but Europe’s open saw the currents turn.

Dealers struggled to put their finger on the exact cause but London, Frankfurt and Paris all took an early dip to leave the regional Stoxx 600 as much as 0.5% lower and bonds and other safe-haven assets suddenly back in demand.

“You had some good news in terms of China coming off the list of currency manipulators and so you would have expected bond prices to extend losses,” said Andy Cossor, a rates strategist at DZ Bank in Frankfurt. “So, I think it might be a case that people got ahead of themselves yesterday and are covering short positions.”

A number of heavyweight, emerging-market currencies were on the ropes too. The highly-sensitive SA rand hit a three-week low and Turkey’s lira took its biggest tumble since mid-December. China’s yuan also backed off its highest since July hit overnight after the US treasury department said on Monday that China should no longer be designated a currency manipulator — a label it applied as the yuan dropped in August.

Beijing, meanwhile, had given its approval too by fixing the yuan’s official trading-band midpoint at its firmest in more than five months.

China has also pledged to buy an additional almost $80bn of US manufactured goods over the next two years, plus more than $50bn extra in energy supplies, according to a source briefed on a trade deal.

The change in the mood in Europe also came as Wall Street and other US futures turned lower after their latest record highs on Monday. The moves coincided with the arrival of a Chinese delegation in Washington ahead of Wednesday’s signing of the phase-one trade agreement, seen as calming a dispute that has up-ended the world economy.

“There have been a number of false starts,” said Vishnu Varathan, head of economics at Mizuho Bank in Singapore. “The fact that this is really coming to the moment when the rubber hits the road is the most tangible evidence of traction in starting to resolve issues, that’s what’s driving optimism.”

In contrast to Europe’s swoon, Japan’s Nikkei added 0.7% overnight to hit its highest in a month. Australian shares rose by the same margin to close at a record. Hong Kong’s Hang Seng and Shanghai blue chips also hit multi-month peaks before running out of steam.

US trade representative Robert Lighthizer told Fox Business late on Monday that the Chinese translation of the deal’s text is almost done. “We’re going to make it public on Wednesday before the signing.” 

New season

In tandem with the swings, gold began to claw off a two-week low, although it was still about 0.3% weaker for the day as a whole at $1543 an ounce.

Ten-year US treasury note yields dropped a couple of ticks 1.8354% compared with the 1.85% they had been at in Asia.

In currency markets, the yen also stabilised after weakening past the ¥110 to the dollar mark, and the Swiss franc was marginally higher against a lifeless euro.

Besides the trade deal, investors are also looking to US inflation data due at 1.30pm GMT — with consensus expectations for it to hold steady at 0.2% in December — and the beginning of the fourth-quarter US company results season.

Big banks JPMorgan Chase, Citigroup and Wells Fargo are due to report earnings before market open on Tuesday.