Global Markets: Stocks back to 'risk-on' after Trump's trade war scare

European stocks recovered on Wednesday from their losses the day before, when U.S. President Donald Trump surprised world markets by saying a trade deal with China could wait until after the 2020 presidential election in November.

Morning gains became a rally when Bloomberg, citing unidentified sources, said the United States and China were in fact moving closer to agreeing on the amount of tariffs that would be rolled back in phase one of a trade deal.

While Trump had dashed hoped for a preliminary agreement and triggered a sell-off in stocks on Wall Street and in Asia, the Bloomberg report caused a brutal swing that took traders by surprise.

"There are playing with the nerves of investors," said Mikael Jacoby, a senior equity sales trader at Oddo Securities, adding there was a sense of fatigue and frustration watching markets swing on the basis of headlines and tweets.

"One day they will guide positively, another negatively", Jacoby said, noting that markets could be expected to continue their up and down moves until a trade agreement is reached.

Fresh U.S. tariffs on Argentina and Brazil, plus a threat to impose duties on French goods, are fuelling fears that risks are tilting towards an escalation of the crisis.

The pan-European equity index STOXX 600, which had slumped 2.2% since the beginning of the month, was up 1%. Futures markets were signalling a Wall Street opening in positive territory.

Before the Bloomberg report, European trading showed little reaction when data indicated euro zone business activity stayed near stall speed last month. Manufacturing continued to drag on the dominant services industry.

Euro zone government bond yields yo-yoed in early trading, but speculation on a possible U.S./China agreement pushed 10-year German Bund yields up 1 basis point to -0.337%.

Yields across the euro area followed suit, rising by 1 to 2 bps. In the United States, the 10-year Treasury yield jumped by 1.75%, then fell back to about 1.74%.

TOO COMPLACENT?

The latest trade war scare ended a rally that had lifted the S&P 500 since early October, when top diplomats from China and the United States met and outlined an initial agreement that Trump said he hoped could be sealed within weeks.

U.S. Commerce Secretary Wilbur Ross said that if no substantial progress was made soon, another round of duties on Chinese imports, including cell phones, laptops and toys, would take effect on Dec. 15.

The U.S. House of Representatives passed a bill proposing a stronger response to a crackdown on Muslims in western China, drawing swift condemnation from Beijing on Wednesday, to add another layer of tension. Beijing's handling of unrest in Hong Kong has also drawn criticism from Washington.

"The market was too complacent, thinking both superpowers would be able to compartmentalize these issues away from the broader trade narrative," Stephen Innes, chief Asia market strategist at AxiTrader, said in a note.

In currency markets, the euro retreated against the dollar to 1.1068. The Japanese yen and Swiss franc, seen as safe havens, were down 0.1% and 0.2% respectively.