World stocks pause at record peak as markets assess US-China deal

World stocks inched ahead to a record high on Thursday after the US and China signed an initial deal to defuse their 18-month trade war, though financial markets were wary as a number of thorny issues remained unresolved.

MSCI's broadest index of world stocks firmed 0.03 per cent in Asia after closing at a record level on Wednesday, while its index on Asia-Pacific shares outside Japan rose 0.13 per cent, with India and Australia hitting record highs.

Japan's Nikkei rose 0.14 per cent while mainland China's Shanghai composite index was almost flat. The Pan-European Euro Stoxx 50 futures were up 0.03 per cent and German DAX futures ticked up 0.1 per cent in early trade.

US President Donald Trump and Chinese Vice-Premier Liu He on Wednesday signed a deal that will roll back some tariffs and see China boost purchases of US goods and services by $200 billion over two years.

“Whether somebody looks at this as big progress or little progress, it is something tangible and so the arrow is pointing in a direction that the market is comfortable with,” said Chuck Carlson, chief executive officer of Horizon Investment Services at Hammond, Indiana in the US.

The Phase 1 deal, however, does not fully eliminate the tariffs, while the $200-billion purchase targets, which include energy, farm and manufacturing products, look daunting to achieve.

Nor does it address structural economic issues that led to the trade conflict. Officials say these will be dealt with in Phase 2 negotiations, though the differences there are so fundamental that many investors doubt whether any deal will come through.

“US-China tensions go beyond trade and will remain even after the Phase 1 deal signing and during the Phase 2 negotiations, and may accelerate after the US election,” said economists at Citigroup Global Markets.

“The (deal's) enforcement mechanism allowing unilateral actions essentially implies the risk of a snapback of US tariffs or Chinas commitments,” they added.

On Wall Street, the S&P 500 closed at a record high of 3,289.3 points, up 0.19 per cent, with gains fairly small after the market has rallied for months on hopes of a deal.

The index was dragged down by a fall in financial shares, following lacklustre earnings from Bank of America and Goldman Sachs.

“While the trade deal has provided a relief, there weren't any positive surprises for markets. For shares to rise further, we need more evidence of improvement in the real economy and earnings,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities.

US shares are traded above 18 times expected earnings, near their post-2008 financial crisis peak marked at the start of 2018.

DISINFLATION EVERYWHERE

Bond yields dropped as a boost from the trade deal failed to offset pressure from low US producer price inflation data, which highlighted persistently low inflationary pressure.

The price index rose less than expected in December to cap 2019 with a rise of 1.3 per cent, the lowest since 2015.

The 10-year US Treasuries yield slipped to a one-week low of 1.780 per cent, compared with a high of 1.900 per cent last Thursday and last stood at 1.793 per cent.

Weak inflation was evident also in the UK where consumer price inflation slowed to 1.3 per cent, its slowest rate in three years.

The data fanned bets the Bank of England will cut interest rates at the end of this month, pushing the 10-year gilts yield to a 2 1/2-month low of 0.630 per cent.

The British pound last traded at $1.3047, having managed to recover a tad from its three-week low touched earlier this week.

The Swiss franc held firm, having risen to its strongest against the dollar in over a year and its highest against the euro in almost three years after the US added Switzerland to its watchlist of currency manipulators.

Washington's decision led traders to think it will become difficult for the Swiss National Bank to intervene to weaken the franc in the future.

The Swiss currency last stood at 0.9644 franc per dollar, near Wednesday's high of 0.9631.

In contrast, the Chinese yuan hovered just below its 5-1/2-month high touched earlier this week after Washington dropped its currency manipulator label on China.

Coupled with the trade deal, warmer ties between the two countries are seen as positive for the Chinese economy and its currency.

The offshore yuan stood at 6.8872 to the dollar, near Tuesday's high of 6.8662. Other currencies have had a mostly muted reaction to the trade deal.

Against the yen the dollar traded at 109.93 yen, below its near eight-month peak of 110.22 set on Tuesday. The euro stood at $1.1151, extending its recovery from a low of $1.10855 hit last Friday.

Oil prices edged back after touching a six-week trough the previous day on data showing big increases in US refined products and hopes for more Chinese purchases of US oil and gas.

Brent crude futures rose 0.7 per cent to $64.45 a barrel, while US West Texas Intermediate (WTI) crude gained 0.73 per cent to $58.23 per barrel.