Stocks inch off 3-week lows but little respite for emerging markets

Fresh sparring between Washington and Beijing over trade kept world stocks close to three-week lows on Wednesday, while a slight dollar pullback gave little respite to emerging markets, with the Indian rupee plumbing new record lows.

The months-long escalation in tensions between the world's two biggest economies has shown no sign of letting up, as US President Donald Trump had said on Tuesday the United States was taking a tough stance with China. That cemented expectations that fresh levies on Chinese exports will soon be announced.

Trump's comments came after China told the World Trade Organization (WTO) it wanted to impose $7 billion a year in sanctions on the United States in retaliation for non-compliance with a ruling in an earlier trade dispute.

Equity markets also faced pressure from US two-year bond yields which touched a decade peak on Tuesday, partly spurred by data that provided yet more evidence of the US economy's strength. That data pushed Wall Street to a strong close, led by tech and energy shares, but futures signalled US shares opening flat. European stocks however firmed almost half a percent, moving off recent five-month lows.

MSCI's all-country equity index inched up marginally, looking to extend two sessions of modest gains that had snapped six straight days of losses. But emerging equities retreated to new 15-month lows. Asian equities, excluding Japan, hit their lowest since July 2017 after sharp falls in Hong Kong and Shanghai .

“What the market needs is a signal of some relaxation in trade rhetoric, a bit of climb down,” said Salman Ahmed, chief investment strategist at Lombard Odier. “That should be enough as fundamentals are strong. But you do need a trigger point and so far we have not seen it.”

He said the other catalyst could be signals from the US Federal Reserve that it could slow the pace of rate rises but given the torrent of strong US data, that looks unlikely - data this week showed US small business optimism at the highest level on record.

Under pressure

Emerging currencies stayed under pressure. The yuan slipped to 2-1/2 week lows against the dollar, leading Asian peers lower and keeping the Australian dollar - heavily linked to Chinese trade - close to its lowest since February 2016.

Emerging markets have been the biggest victims of the trade spats and rising US interest rates. An index of emerging currencies is down almost 7 per cent this year.

Emerging markets' woes have been exacerbated in many cases by heavy borrowing over the past decade, with Societe Generale analysts noting that “the misallocation of capital following a decade of cheap money is starting to be exposed”.

While the worst hit Turkish lira and Argentine peso have steadied off record lows, the Indian rupee is continuing to plumb new troughs, taking year-to-date losses versus the dollar to more than 12 percent.

“The rupee ... is symptomatic of the overall situation in emerging markets, but it also embeds some idiosyncratic problems - with the fiscal deficit growing and the current account deficit widening on back of rising commodity prices,” said Cristian Maggio, head of emerging markets strategy at TD Securities.

The dollar inched 0.2 per cent lower against a basket of currencies, as hopes grew of concessions by Canada that would resolve disputes over reworking the North American Free Trade Agreement.

Long-dated US bond yields stayed just off the one-month highs hit on Tuesday after data showing sustained strength in the jobs market and the Treasury started a record debt sale amounting to almost $150 billion.

The rise in US yields has hit Italy. It has been one of the bright spots in world markets in recent days, as fears have receded of a government spending binge. But Italian 10-year yields rose 2 bps off six-week lows. The British pound also slipped off five-week highs hit this week against the dollar, as nascent optimism over a Brexit trade deal with the European Union subsided.

Oil prices extended Tuesday's $2 surge, with Brent futures closing in on $80 a barrel as Hurricane Florence advanced and U.S. sanctions started weighing on Iran's exports.