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Fear of expanding trade war sinks global equities; bonds rally

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By Reuters
Fear of expanding trade war sinks global equities; bonds rally
Traders work on the floor of the New York Stock Exchange as U.S. President Donald Trump meets with France's President Emmanuel Macron on the television, shortly after the opening bell, in New York, U.S., December 3, 2019. REUTERS/Lucas Jackson   -   Copyright  LUCAS JACKSON(Reuters)
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By David Randall

NEWYORK (Reuters) – Signs that a deal to end the U.S.-China trade war might not come until after the November 2020 elections weighed on global equity markets on Tuesday as investors sought out the perceived safety of bonds.

Comments by U.S. President Donald Trump that the trade war may last another year came a day after his administration announced new tariffs on steel from Brazil and Argentina and threatened duties of up to 100% on French goods from champagne to handbags because of a digital services tax that Washington says harms U.S. tech companies.

His latest comments appear to dash hopes that an agreement with China could be reached before another round of tariff hikes kicks in on Dec. 15.

“As we get closer to the December 15th deadline for new tariffs being imposed on China, risk markets will likely become increasingly nervous as each day passes if we get no news confirming either a date to sign a phase one deal or a delay in these tariffs being imposed,” said Mohammed Kazmi, portfolio manager for UBP’s Global & Absolute Fixed Income team.

MSCI’s gauge of stocks across the globe <.MIWD00000PUS> shed 0.75% following broad declines in Europe.

On Wall Street, the Dow Jones Industrial Average <.DJI> fell 377.44 points, or 1.36%, to 27,405.6, the S&P 500 <.SPX> lost 32.17 points, or 1.03%, to 3,081.7 and the Nasdaq Composite <.IXIC> dropped 89.40 points, or 1.04%, to 8,478.59.

Europe appeared to be the next theater of the global trade war.

“If history is any guide, the Europeans are likely to find U.S. crosshairs start to move increasingly their way, the closer to next year’s U.S. election we get,” CMC Markets told clients.

France said Tuesday it was prepared to push the European Union to respond in kind if the United States followed through on its threats to raise tariffs.

“In the case of new American sanctions, the European Union would be willing to retaliate,” French Finance Minister Bruno Le Maire told Radio Classique.

Investors sought out bonds as a safe haven, pushing U.S. Treasuries yields off of two-week highs. Benchmark 10-year notes <US10YT=RR> last rose 39/32 in price to yield 1.702%, from 1.836% late on Monday. The rush into Treasuries produced the largest one-day decline in yields since August.

German bond yields meanwhile, slipped off three-week highs <DE10YT=RR>, but bond prices are likely to stay under pressure amid renewed risks of early elections or a minority government in the biggest euro zone economy.

The safe-haven bid was in evidence on currency markets too, with the yen at a one-week high to the dollar <JPY=D3>. The euro edged away from a near two-week peak versus the greenback <EUR=EBS>. The dollar index slipped to a two-week low <.DXY>.

“This may have run its course, but there’s no reason to chase the dollar’s upside from here,” Daiwa Securities’ foreign exchange strategist Yukio Ishizuki said, noting weak manufacturing data had forced many to cut long dollar positions.

“Trade friction remains a lingering threat, which is not good for market sentiment.”

(Reporting by David Randall; editing by Jonathan Oatis and Tom Brown)