World stocks hit by trade strain, Brexit talk supports sterling

By Abhinav Ramnarayan

LONDON (Reuters) - World stocks slipped back towards three-week lows on Tuesday, on ongoing concerns over the trade dispute between Washington and Beijing, while the pound hovered near a five-week high on hopes of a UK-EU deal over Brexit.

MSCI's index of global equities inched lower on the day, after European shares joined Asian bourses in the red as markets awaited action from U.S. 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 percent.

Hopes around a new Brexit deal kept the British pound near five-week highs however, helping lighten the mood a touch in Europe. The currency which rose 0.8 percent on Monday after the European Union's chief negotiator Michel Barnier said a Brexit deal was possible within weeks, hit a new five-week high of $1.3087.

It slightly slipped off those levels as the trade worries returned to lift the dollar off the day's lows.

However, it was the second time in less than a week that Barnier signaled his desire to push ahead on Brexit negotiations, less than seven months before the United Kingdom is slated to leave the European Union on March 29, 2019.

His comments have eased some of the 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," he added.

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 signaled 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 231 basis points, as much as 60 bps tighter than last week's peaks.

TRADE WORRIES WEIGH

Earlier in the session, Asian shares struggled to avoid a ninth straight session of losses as the specter of a further escalation in the Sino-U.S. trade war haunted investors.

MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.05 percent, but held above lows last visited in July last year.

Shanghai blue chips dipped 0.2 percent while South Korea fell 0.2 percent.

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Having warned last week that he was ready to levy additional taxes on practically all Chinese imports, U.S. President Donald Trump was uncharacteristically quiet on trade on Monday.

China will respond if the United States takes any new steps on trade, the foreign ministry said on Monday, after President Donald Trump warned he was ready to slap tariffs on virtually all Chinese imports into the United States.

Separately, it emerged 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 U.S. 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 72.68 per dollar.

"Weakness is set to remain a recurring theme amid global trade tensions, a broadly stronger dollar and prospects of higher U.S. 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.