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.
European shares, having opened broadly higher, were down on the day, with a pan-European index of shares lower 0.3 per cent.
The pound traded near five-week highs against the dollar, hitting a high of $1.3087, after the European Union's chief negotiator Michel Barnier had said on Monday a Brexit deal was possible within weeks. Sterling had risen 0.8 per cent on Monday.
For the second time in less than a week Barnier has signalled his desire to push ahead on the Brexit negotiations, less than seven months before the United Kingdom is slated to leave the European Union on March 29, 2019.
“The Barnier headlines mean there's a lower hurdle for getting a seperation 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,” he added.
The pound has been under pressure on anxiety that Britain would exit from the EU without any formal trading arrangement.
Meanwhile Italian bond yields - which move inversely to price - fell for the seventh straight day on Tuesday, making it the best run in over a year for the benchmark 10-year bond, as Italian politicians signalled that an upcoming budget would likely fall within European Union rules.
The closely-watched Italy/Germany 10-year bond yield spread - seen as an indicator of euro zone sentiment - was at 229 basis points, as much as 60 bps tighter than last week's peaks. The single currency also benefited from this move, rising 0.3 per cent to $1.1628 and as much as 2.9 percent 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 Sino-US trade war haunted investors. MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.05 per cent, but held above lows last visited in July last year. Shanghai blue chips dipped 0.2 per cent, while South Korea fell 0.2 per cent.
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.
China will ask the World Trade Organization next week for permission to impose sanctions on the United States, 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 per 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 U.S. sanctions against Iran's petroleum industry.