Asia stocks scale 3-month peak, resilient to U.S. rioting

SYDNEY/HONG KONG (Reuters) – Asian shares advanced to three-month highs on Monday as progress on re-opening economies helped offset jitters over riots in U.S. cities and unease over Washington’s power struggle with Beijing.

There was also relief that while President Donald Trump began the process of ending special U.S. treatment for Hong Kong to punish China, he left their trade deal intact.

“With specific and verifiable measures against China appearing to be weak, markets may draw hollow consolation that the U.S. is treading carefully,” said analysts at Mizuho in a note.

After a cautious start Asian markets were led higher by China on signs parts of the domestic economy were picking up. Hong Kong .HSI managed to rally 3.3%, while Chinese blue chips .CSI300 put on 2.54%.

An official business survey from China showed its factory activity grew at a slower pace in May but momentum in the services and construction sectors quickened.

“Geopolitical risk can be sufficient to trigger an equity pullback. However, we remain comfortable with our preference for Chinese equities given they tend to be far more sensitive to domestic demand and policy stimulus than global drivers,” said strategists at Standard Chartered Private Banking in a note.

The hopeful signs in China helped lift MSCI’s broadest index of Asia-Pacific shares outside Japan 2.45% to its highest since early March. Tokyo’s Nikkei .N225 added 0.84% to also reach a three-month peak.

E-Mini futures for the S&P 500 recovered to be flat, having been up 0.12% in afternoon trade. EUROSTOXX 50 futures firmed 1.48% and FTSE futures 1.3%.

The resilience was notable given major U.S. cities were cleaning up streets strewn with broken glass and burned out cars as curfews failed to stop confrontations between activists and law enforcement.

The turmoil was a fresh setback for the economy which was only just emerging from a downturn akin to the Great Depression. Following poor data on spending and trade out on Friday, the Atlanta Federal Reserve estimated economic output could drop a staggering 51% annualised in the second quarter.

The May jobs report due out on Friday is forecast to show the unemployment rate surged to 19.8%, smashing April’s record 14.7%. Payrolls are expected to drop by 7.4 million, on top of the 20.5 million jobs lost the previous month.

YEARS, NOT MONTHS

“Current unemployment numbers go far beyond what has been experienced in any post-war recession,” wrote Barclays economist Christian Keller in a note.

“To the extent that some sectors may never return to pre-pandemic business-as-usual, labour faces a substantial challenge to reallocate workers,” he added. “Such a process could be a matter of years rather than months or quarters and in the meantime it would weigh on consumer demand.”

Bond investors suspect economies will need massive amounts of central bank support long after they reopen and that is keeping yields super low even as governments borrow much more.

Yields on U.S. 10-year notes were trading steady at 0.66% having recovered from a blip up to 0.74% last month when the market absorbed a tidal wave of new issuance.

The decline in U.S. yields has been a burden for the dollar, but the world’s reserve currency also tends to benefit from safe-haven status to limit the losses.

In afternoon trade, the dollar was 0.3% softer on a basket of peers at 97.923 having touched an 11-week low of 97.944 on Friday. It was also down on the yen at 107.50.

Much of the dollar’s recent decline has come against the euro which has been broadly boosted by plans for an EU stimulus package. The single currency was last up at $1.1143, after climbing 1.8% last week.

Markets are awaiting a meeting of the European Central Bank on Thursday where it is widely expected to raise its asset buying by around 500 billion euros to 1.25 trillion.

Related Coverage

  • Analysts' View: Impact of the U.S. protests on financial markets

In commodity markets, gold added 0.91% to $1,742 an ounce.

Oil prices initially eased on worries about U.S. demand, but found support from reports Russia had no objection to the next meeting of OPEC and its allies being brought forward to June 4 from the following week.

Brent crude futures were off 37 cents at $37.70 a barrel, while U.S. crude fell 31 cents to $35.38.

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Asia's factory pain worsens as China's recovery fails to lift demand

TOKYO (Reuters) – Asia’s factory pain deepened in May as the slump in global trade caused by the coronavirus pandemic worsened, with export powerhouses Japan and South Korea suffering the sharpest declines in business activity in more than a decade.

A series of manufacturing surveys released on Monday suggest any rebound in businesses will be some time off, even though China’s factory activity unexpectedly returned to growth in May.

China’s Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) hit 50.7 last month, marking the highest reading since January as easing of lockdowns allowed companies to get back to work and clear outstanding orders.

But with many of China’s trading partners still restricted, its new export orders remained in contraction, the private business survey showed on Monday. China’s official PMI survey on Sunday showed the recovery in the world’s second-largest economy intact but fragile.

Japan’s factory activity shrank at the fastest pace since 2009 in May, a separate private sector survey showed while South Korea also saw manufacturing slump at the sharpest pace in more than a decade.

Capital Economics said the region’s manufacturing sector is in deep recession.

“Industry is likely to have seen an initial jump from the easing of lockdown restrictions. And things are likely to continue improving very gradually over the coming months as external demand recovers,” Capital Economics wrote. “But output is still likely to be well below normal levels for many months to come as domestic and global demand remain very depressed.”

Taiwan’s manufacturing activity also fell in May. Vietnam, Malaysia and the Philippines saw PMIs rebound from April, though the indices all remained below the 50-mark threshold that separates contraction from expansion.

Official data on Monday showed South Korea extending its exports plunge for a third straight month.

Asia’s economic woes are likely to be echoed in other parts of the world including Europe, where economies continue to suffer huge damage in factory and service sectors.

With many countries starting to ease lockdown restrictions imposed to stop the spread of the virus, which has infected over 5.5 million people globally, equity markets are rallying on hopes for a swift return to health and prosperity.

But the trough in global economic activity will be deeper and the rebound is likely to take longer than previously predicted as the pandemic spreads in waves.

The International Monetary Fund warned last month the global economy will take much longer than expected to recover fully from the virus shock, suggesting a downgrade to its current projection for a 3% contraction this year.

A U.S.-China spat over Hong Kong’s status and Beijing’s handling of the pandemic could sour business sentiment and add to already huge strains on the global economy.

The final au Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) fell to a seasonally adjusted 38.4 from 41.9 in April, its lowest since March 2009.

South Korea’s IHS Markit purchasing managers’ index (PMI) edged down to 41.3 in May, the lowest since January 2009 and below 41.6 in April.

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Stocks slip as investors await Trump's Hong Kong response

LONDON (Reuters) – Global stock markets fell and safe havens such as bonds and the Japanese yen gained on Friday, as investors awaited Washington’s response to China tightening control over the city of Hong Kong.

China’s parliament on Thursday pressed ahead with national security legislation for the city, raising fears over the future of its freedoms and its function as a finance hub.

U.S. President Donald Trump said he would hold a news conference on China later on Friday. Trepidation about a further deterioration in Sino-U.S. relations put investors on edge.

European stocks opened lower, with the pan-European STOXX 600 index down 0.86%. Germany’s DAX .GDAXI fell 1.2%, Britain’s FTSE 100 by 1% .FTSE and France’s CAC 40 by 1%. [.EU] Futures for the S&P 500 ESc1 slipped 0.4%. [.N]

Earlier in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.2%. Japan’s Nikkei .N225 retreated from a three-month high and the yen rose to a two-week high of 107.06 against the dollar. Bonds rose.

“The question is how far Trump will go at today’s press conference, as removing Hong Kong’s favoured status would probably spark negative market developments, hitting global risk sentiment, which could backfire on the U.S. economy as it would further deteriorate the relationship with China,” said strategists at Danske Bank in a note to clients.

Trump offered a muted response to Hong Kong’s mass democracy protests last year while pursuing a trade deal with China. But ties with Beijing have since soured considerably through the COVID-19 pandemic.

Hong Kong’s government warned on Friday that withdrawing its special U.S. status, which has underpinned it as a finance hub, could be a “double-edged sword” and urged the United States to stop interfering in its internal affairs.

The Chinese yuan CNY= weakened in offshore trade. [CNY/]

Hong Kong’s Hang Seng index .HSI was 0.8% lower and has lost about 3% in the two weeks since news of China’s security legislation broke. [.HK]

In bond markets, yields on benchmark 10-year U.S. Treasuries US10YT=RR fell to 0.6656%, more than 100 basis points below where they began 2020.

For a graphic on world FX rates in 2020, please click: here

MAY MARCHES ON

Despite the gathering tension and the near-daily release of grim economic data, enormous global stimulus seems to have propped up stocks. The S&P 500 .SPX is up 4% for the month and on track for its best May since 2009.

A rally in the risk-sensitive Aussie dollar AUD=D3 is slowing, but the currency has gained nearly 2% for the month and sits 20% above March lows.

MSCI’s All Country World Index .MIWD00000PUS, which tracks stocks across 49 countries, is on track for a 3.5% gain this week – its best weekly performance since April.

The optimism stems from signs of progress in the world economy. The number of Americans seeking jobless benefits fell for an eighth straight week last week and New York has outlined plans for re-opening.

“As we have said about the re-opening and ensuing recovery, this is a process,” said RBC Capital Markets’ chief U.S. economist, Tom Porcelli. “And right now the process is moving along in the right direction.”

The euro EUR= was headed for its best month since December as the European Union’s 750 billion-euro coronavirus recovery fund fuelled optimism about the EU’s political future. [FRX/] It hit a two-month high of $1.1114 and last traded at $1.1106.

The dollar sank against a basket of currencies, down 0.2%. =USD

Gold was up 0.1% at $1,720.27 an ounce. [GOL/]

Brent crude LCOc1 slipped 1.5% to $34.76 a barrel. U.S. crude Clc1 fell 2.2% to $32.99 a barrel. [O/R]

Both contracts are headed for their biggest monthly gains in years as production cuts and optimism about demand recovery led by China supported prices.

London aluminium prices, which stayed flat on Friday, were set for their strongest monthly gain since January 2019, underpinned by a solid recovery in demand from top consumer China. [MET/L]

Recovery on course? here

(The story corrects FTSE decline in fourth paragraph to 1%.)

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U.S.-China tension to push Asian shares lower in choppy trade

NEW YORK (Reuters) – Asian shares were set to dip in choppy trade on Friday as worries about worsening U.S.-China ties offset the fillip from hopes massive government stimulus can jump-start the world economy.

E-Mini futures for the S&P 500 ESc1 edged down 0.12% in early Asian trade, while Nikkei futures NKc1 pointed to a loss of 10 points. Weaker Australian stock futures YAPcm1 also indicated a softer open.

Underscoring the ambivalence in markets, U.S. stocks slid from a near three-month high in a late sell-off overnight, after U.S. President Donald Trump signed an executive order that would weaken laws protecting social media companies, and said he’d hold a news conference about China on Friday.

In the latest dispute between the world’s two biggest economies, the U.S. government has signaled plans to punish Beijing for proceeding with a national security law for Hong Kong that critics fear would erode the city’s freedoms.

All eyes are now on Friday’s press conference hosted by Trump where he will address his response to China over its treatment of Hong Kong.

It is not clear if Trump will rescind some, none, or all of the U.S. economic privileges that Hong Kong enjoys under U.S. law. Larry Kudlow, Trump’s top economic adviser, said on Thursday Hong Kong may now need to be treated like China on trade and other financial matters, which could have implications for tariffs and stock market listings.

“Risk appetite quickly disappeared after President Trump announced he would address China tomorrow at a press conference. It didn’t take much to help traders rush to exits,” Edward Moya, a senior market analyst at currency trader Oanda, wrote in a note.

If tensions between China and the United States intensify, a build-up of short positions in the S&P 500 index, or bets that the index will fall, could spark a sell-off in shares, Moya added.

Stock markets have rebounded from lows hit in mid-March on hopes that enormous government stimulus could help the world economy recover more quickly than expected from the coronavirus shutdown. Some analysts have warned, however, that such optimism is misplaced given the extent of economic devastation.

Indeed, the latest U.S. data showed the economy may be stabilising, but at a much lower level.

Figures released overnight showed the number of Americans seeking jobless benefits fell for an eighth straight week last week, but claims remained astonishingly high.

In a sign investors are undecided about how much risk to take on, prices for safe-haven gold rose, even as the U.S. dollar and Japanese yen — in demand when investors shy from risk — softened.

Spot gold XAU= was slightly firmer at $1,718.87 per ounce from $1,712.35 seen overnight.

The dollar index =USD slipped 0.4% to 98.51, held back in part by a stronger euro EUR=, as the common currency continued to bask in the glow of a 750-billion-euro coronavirus recovery fund for the European Union.

The euro was firm at $1.1073 against the dollar, near a two-month high of $1.1087, while the yen edged down 0.07% to 107.07 on the dollar.

U.S. Treasury yields were steady after inching higher overnight as gains in stocks softened demand for bonds. Benchmark 10-year yields held at 0.7050%.

Oil prices gave up some of their gains overnight, as concerns that Trump could impose sanctions on China over Hong Kong and a surprise build in inventories overshadowed a steady improvement in U.S. refining activity.

In early Friday trade, U.S. West Texas Intermediate crude CLc1 had slipped 0.18% to $33.65.

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Asian stocks pull back as Hong Kong uncertainty weighs

NEW YORK (Reuters) – Asian shares shed some of their recent gains on Wednesday as investor concerns about rising tensions between the United States and China tempered optimism about a re-opening of the world economy.

U.S. President Donald Trump said late on Tuesday he is preparing to take action against China this week over its effort to impose national security laws on Hong Kong, but gave no further details.

Worsening relations between the world’s two biggest economies will further hobble global growth, already in the doldrums due to the coronavirus pandemic worldwide.

E-Mini futures for the S&P 500 edged down 0.05%, just short of the 3,000 chart level. The index had cleared 3,000 points in Wall Street overnight before pulling back, as some traders returned to the New York Stock Exchange floor for the first time in two months.

The Nikkei share average slipped 0.1%, unwinding some of the gains made on Tuesday when it climbed to their highest in nearly 12 weeks. Australia’s ASX 200 lost 0.9% in early trade and South Korea’s KOSPI fell 0.2%.

Graphic: Asian stock markets – here

“The S&P500 looked to be set to close above 3,000 until the late headline that the United States was considering a range of sanctions on Chinese officials and businesses should China go ahead with its legislation regarding Hong Kong,” analysts at the National Australia Bank said in a note.

“The extent of those possible sanctions is uncertain,” the analysts said.

China’s plans to impose national security laws in Hong Kong have triggered the first big street unrest in the Asian financial hub for the first time since last year. Overnight, hundreds of riot police took up posts around Hong Kong’s legislature in anticipation of protests on Wednesday.

Indeed, some analysts warned that even the recent jump in share prices showed signs of caution.

“Stock buying in the last 24 hours has a strong defensive bent,” Michael McCarthy, chief market strategist at CMC said in a note. “Beaten down consumer and financial stocks are leading markets higher, at the expense of the previously popular tech and healthcare sectors.”

Moderating demand for risk helped the safe-haven U.S. dollar index to edge up 0.03% to 99.042, reversing from losses overnight.

U.S. Treasury yields retreated from levels struck overnight, with two-year yields hovering at 0.170%, up from a record low of 0.105% struck on May 8, but still under 0.20%.

Gold prices rebounded from losses as some investors played it safe, with spot gold unchanged at $1,711.45 per ounce.

The retreat from risk led oil prices to give up earlier gains. U.S. West Texas Intermediate crude futures were down 0.3%.

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Japan shares scale 10-week peak, S&P 500 up sharply

SYDNEY (Reuters) – Asian shares forged ahead on Tuesday while U.S. stock futures breached a major chart barrier as investors brushed past Sino-U.S. trade tensions to more stimulus in China and a re-opening world economy.

Japan’s Nikkei .N225 took the lead with a rise of 1.7% to its highest since early March when the economic impact of the coronavirus was just becoming clear.

MSCI’s broadest index of Asia-Pacific shares outside Japan advanced 1.6%, while South Korea .KS11 rose 1.5%.

E-Mini futures for the S&P 500 climbed 2% to clear the 3,000 chart level. EUROSTOXX 50 futures added 0.98% and FTSE futures 2.2%.

Chinese blue chips .CSI300 firmed 0.8% after the country’s central bank said it would strengthen economic policy and continue to push to lower interest rates on loans.

While largely reiterations of past comments, they helped offset the war of words between Washington and Beijing over trade, the coronavirus and China’s proposals for stricter security laws in Hong Kong.

“U.S.-China tensions continue to simmer in the background, but equity investors appear more interested on the prospect of economies reopening around the globe,” said Rodrigo Catril, a senior FX strategist at NAB.

“On this score, Japan ended its nationwide state of emergency, Spaniards have returned to bars in Madrid wearing masks and England will reopen some businesses on June 1.”

There were reports Tuesday that Germany wants to end a travel warning for tourist trips to 31 European countries from June 15 if the coronavirus situation allows.

Bond investors suspect economies will still need massive amounts of central bank support long after they reopen and that is keeping yields low even as governments borrow much more.

Yields on U.S. 10-year notes were trading at 0.67% having recovered from a blip up to 0.68% last week when the market absorbed a tidal wave of new issuance.

The decline in U.S. yields might have been a burden for the dollar but with rates everywhere near or less than zero, major currencies have been holding to tight ranges.

The dollar was a fraction firmer on the yen on Monday at 107.83 JPY= but well within the 105.97 to 108.08 band that has lasted since the start of May.

The euro was a shade firmer at $1.0916 EUR=, having spent the month so far wandering between $1.0765 and $1.1017.

Against a basket of currencies the dollar was 0.2% lower at 99.620 =USD, but still sandwiched between support at 99.001 and resistance around 100.560.

Analysts at CBA felt the dollar could break higher should China-U.S. tensions actually threaten their trade deal.

“Although not our central scenario, if the U.S. or China were to withdraw from the Phase One deal, USD would sharply appreciate while CNH, AUD and NZD would decline,” they wrote in a note to clients.

In commodity markets, gold edged up 0.2% to $1,733 an ounce.

Oil prices were supported by falling supplies as OPEC cut production and the number of U.S. and Canadian rigs dropped to record lows for the third week running.

Brent crude futures rose 71 cents to $36.24 a barrel, while U.S. crude gained $1.14 to $34.39.

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Global stocks skid as Hong Kong returns as Sino-U.S. flashpoint

TOKYO (Reuters) – Global shares tumbled on Friday as Hong Kong’s political unrest returned as a flashpoint in fast-deteriorating U.S.-China relations, following Beijing’s moves to impose a new security law on the city.

The Asian financial hub’s benchmark Hang Seng index .HSI sank 5% to a seven-week low, pulling MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS down 2.5%.

The CSI300 index of mainland Chinese shares .CSI300 dropped 1.9% while Japan’s Nikkei .N225 lost 1%. Pan-European Euro Stoxx 50 futures STXEc1 were down 0.97% while e-mini futures for U.S. S&P500 EScv1 lost 0.8%.

China is set to impose new national security legislation on Hong Kong to tighten its grip on the semi-autonomous city.

The decision drew a warning from President Donald Trump that Washington would react “very strongly” against the attempt to gain more control over the former British colony.

“It is starting to look like a U.S.-China summer of discontent in the making,” said Stephen Innes, chief global market strategist at AxiCorp.

“So far, China’s response has been relatively tame despite Trump’s daily goading. That might be due so that policymakers can focus on the NPC, but there is always the possibility of a firmer response.”

Hong Kong activists called on Friday for people to rise up against Beijing’s plans although a proposed midday march in the central financial district did not materialise.

The new Sino-U.S. rift comes amid already tense relations between the two superpowers after Washington stepped up its rhetoric against China over the coronavirus and other points of difference.

Earlier this month, the U.S. State Department delayed a report to Congress assessing whether Hong Kong enjoys sufficient autonomy from China to continue receiving special treatment from the United States.

Washington has ramped up criticism of China over the origins of the pandemic. Last week, it moved to block global chip supplies to blacklisted telecoms equipment giant Huawei Technologies, while the U.S. Senate passed legislation that could prevent some Chinese companies from listing their shares on U.S. exchanges.

Rising tensions are casting a pall over recent optimism that the worst of the pandemic’s economic impact was already over in most developed countries.

The pace of recovery remains highly uncertain — a point highlighted by China’s decision not to set an economic growth target this year for the first time in decades.

While Beijing pledged more government support for the virus-hit economy, it set a target to create over 9 million urban jobs this year, down from a goal of at least 11 million in 2019 and the lowest since 2013.

“The absence of a GDP growth target for this year confirms that, as we expected, policymakers accept that, after the plunge in Q1, economic growth will be low for 2020 as a whole even with a significant sequential recovery in Q2-Q4,” Oxford Economics said in a note to clients.

“The sizeable overall fiscal deficit target indicates significant policy support for the domestic recovery that we expect to continue despite the challenging external background. We expect year-on-year GDP growth to average 4% in H2.”

The worsening mood pushed riskier currencies lower, with the Australian dollar dropping 0.5% to $0.6531 AUD=D4 and the euro easing 0.25% to $1.0922 EUR=.

The safe-haven yen gained 0.15% to 107.45 per dollar JPY=.

The yen brushed off the Bank of Japan’s new lending scheme to channel more money to small businesses, which mimics the U.S. Federal Reserve’s “Main Street” programme.

The decision had been widely anticipated after the BOJ flagged the creation of the scheme last month.

Oil prices also tumbled from a two-month peak with U.S. crude futures CLc1 losing 7.3% to $31.44 per barrel.

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Stocks slip on U.S.-China tensions; oil rises to 2-1/2-month high

NEW YORK/LONDON (Reuters) – Global equities slid on Thursday on concerns about the long-term impact of the new coronavirus and resurgent U.S.-China tensions, though oil markets ignored those worries and marched to 2-1/2 month highs.

European equities .FTEU3 fell about 0.8%, while the S&P 500 and Nasdaq on Wall Street declined about the same.

The dollar edged higher as investors weighed the impact of global business lockdowns and the euro’s four-day rally against the U.S. currency ran out of steam. The strong dollar pushed gold down more than 1%, off this week’s 7-1/2 year peak.

Rising tensions between Washington and Beijing raised doubts about the “Phase 1” trade deal reached early this year and also supported the safe-haven dollar.

President Donald Trump warned the United States would react “very strongly” against China trying to gain more control over Hong Kong through new national security legislation. Tension between the two countries has heightened in recent weeks, as they exchange accusations on the handling of the coronavirus pandemic.

“The biggest threat to the U.S. market this year is actually the potential for ignition of the tariff war, between the U.S. and China,” said Kristina Hooper, chief global market strategist at Invesco in New York.

MSCI’s gauge of stocks across the globe .MIWD00000PUS shed 0.76%, while the pan-European STOXX 600 index lost 0.75%.

On Wall Street, the Dow Jones Industrial Average .DJI fell 101.78 points, or 0.41%, to 24,474.12. The S&P 500 .SPX lost 23.1 points, or 0.78%, to 2,948.51 and the Nasdaq Composite .IXIC dropped 90.90 points, or 0.97%, to 9,284.88.

Purchasing manager index surveys (PMIs) in Europe confirmed economic activity has begun to return, though they were far from stellar.

Euro zone-wide figures came in better than expected overall but Germany’s improvement undershot forecasts. It was the third month in a row that the surveys were plonked firmly in economic contraction territory.

Oil rose on the view that fuel demand should rebound. Brent, the international benchmark, has bounced up $20 a barrel over the past month.

U.S. crude futures CLc1 rose 43 cents to settle at $33.92 a barrel, while Brent LCOc1 settled up 31 cents at $36.06 a barrel.

The market absorbed the latest glut of government debt to pay for coronavirus support programs fairly smoothly. The United States on Wednesday auctioned $20 billion of 20-year debt, the first such sale since 1986.

Italy sold roughly the same on Thursday and Spain said it will need to raise almost 100 billion euros more than planned.

The benchmark U.S. 10-year notes US10YT=RR fell 0.4 basis points to yield 0.6753%.

U.S. weekly jobless claims came in at a seasonally adjusted 2.4 million, in line with a Reuters survey of economists ahead of the data and well off the record 6.867 million at the end of March.

The dollar index =USD rose 0.287%, with the euro EUR= down 0.31% to $1.0943. The Japanese yen weakened 0.05% versus the greenback at 107.60 per dollar.

U.S. gold futures GCv1 settled 1.7% lower at $1,721.90 an ounce.

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GLOBAL MARKETS-Stocks slip on U.S.-China tensions; oil rises to 2-1/2-month high

(Adds oil, gold settlement prices)

* Oil prices extend gains to 2-1/2 month high

* Dollar trying to snap four-day losing streak

* Bond markets digest glut of supply

* U.S. jobless claims 2.4 million, in line with estimates

By Herbert Lash and Marc Jones

NEW YORK/LONDON, May 21 (Reuters) – Global equities slid on Thursday on concerns about the long-term impact of the new coronavirus and renewed U.S.-China tensions, though oil markets ignored those worries and marched to a 2-1/2 month highs.

Bourses in London, Paris and Frankfurt fell around 1%, but Wall Street declined less than half that.

The dollar traded in a narrow range as investors weighed the impact of global business lockdowns and the euro’s four-day rally against the U.S. currency ran out of steam.

Gold fell more than 1% as a strong dollar pushed it off this week’s 7-1/2 year peak.

Rising tensions between Washington and Beijing gave investors pause.

President Donald Trump warned the United States would react “very strongly” against China trying to gain more control over Hong Kong through new national security legislation. U.S. Secretary of State Mike Pompeo on Wednesday called China’s $2 billion pledge to fight the pandemic “paltry.”

“The biggest threat to the U.S. market this year is actually the potential for ignition of the tariff war, between the U.S. and China,” said Kristina Hooper, chief global market strategist at Invesco in New York.

Stocks in the short run are driven by news flow, though bias is to the upside because of easy monetary policy from the Federal Reserve, Hooper said.

MSCI’s gauge of stocks across the globe shed 0.69%, while the pan-European STOXX 600 index lost 0.75%.

On Wall Street, the Dow Jones Industrial Average fell 95.48 points, or 0.39%, to 24,480.42. The S&P 500 lost 19.84 points, or 0.67%, to 2,951.77 and the Nasdaq Composite dropped 72.40 points, or 0.77%, to 9,303.38.

Purchasing manager index surveys (PMIs) in Europe confirmed economic activity has begun to return, though they were far from stellar.

Euro zone-wide figures came in better than expected overall but Germany’s improvement undershot forecasts. It was the third month in a row that the surveys were plonked firmly in economic contraction territory.

Oil rose on the view that slumping fuel demand should rebound. Brent, the international benchmark, has bounced up $20 a barrel over the past month.

U.S. crude futures rose 43 cents to settle at $33.92 a barrel, while Brent settled up 31 cents at $36.06 a barrel.

The market absorbed the latest glut of government debt to pay for coronavirus support programs fairly smoothly. The United States on Wednesday auctioned $20 billion of 20-year debt, the first such sale since 1986.

Italy sold roughly the same on Thursday and Spain said it will need to raise almost 100 billion euros more than planned.

The benchmark U.S. 10-year notes fell 0.4 basis points to yield 0.6736%.

U.S. weekly jobless claims came in at a seasonally adjusted 2.4 million, in line with a Reuters survey of economists ahead of the data and well off the record 6.867 million at the end of March.

The dollar index rose 0.22%, with the euro down 0.23% to $1.0952. The Japanese yen weakened 0.13% versus the greenback at 107.68 per dollar.

U.S. gold futures settled 1.7% lower at $1,721.90 an ounce.

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COLUMN-Franco-German debt push resonates way beyond pandemic: Mike Dolan

(The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own)

By Mike Dolan

LONDON, May 19 (Reuters) – Inevitable caveats aside, this week’s Franco-German push to mutualise European Union debts to help countries worst hit by the COVID-19 slump is a political and financial game changer that goes well beyond the pandemic.

In one fell swoop, the proposal addresses the long-term hit from the coronavirus, smouldering concerns about European fragmentation and the over-reliance on the European Central Bank (ECB) for economic support.

Financial markets, punch drunk from the pandemic shock and jarred this month as Germany’s top court questioned the validity of the ECB’s bond purchases, suddenly sat up and took notice.

Sovereign borrowing costs on the euro zone periphery tumbled, blue-chip euro stocks surged 5% in their biggest daily gain in two months while the euro staged its highest one-day jump against the “safe haven” Swiss franc in eight months.

But if the proposals become EU policy after the bloc’s executive outlines its plans on May 27, they look set to have more far-reaching effects than a curious up-day on the bourses.

Jacob Funk Kirkegaard at Washington’s Petersen Institute described the move as Europe’s long-awaited “Hamilton moment” -reference to the move by the first U.S. Treasury Secretary Alexander Hamilton in the 1790s to have central government assume the debts of individual states after the American War of Independence and sell Treasury bonds to fund them.

“This is a really, really big deal. In both debt mutualisation and common expenditure, a taboo has broken – this is not something the German government has been willing to do before,” he said. “It’s precedent setting and it offers the EU project an entirely new set of powerful tools.”

On Monday, French President Emmanuel Macron and German Chancellor Angela Merkel proposed a 500 billion euro ($550 billion) Recovery Fund offering grants to EU regions and sectors hit hardest by the pandemic.

The leaders, whose agreements traditionally pave the way for EU deals, proposed that the European Commission borrow on behalf of the whole bloc and spend the proceeds as a top-up to the 2021-2027 EU budget which already stands at one trillion euros.

“A system purely based on grants marks a more substantial and powerful transfer of resources than financing largely based on loans,” Morgan Stanley told clients on Monday. “The timing and targeting may help better mitigate the risk of a southern slump without adding to their considerable debt burdens.”

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Investors and financial analysts have been following this saga for months, with initial calls from France, Italy, Spain and others for centralised pandemic relief finance from common euro zone debt sales – so-called coronabonds – seemingly dashed by resistance in Berlin, Vienna and The Hague last month.

Germany’s apparent change of heart, albeit in the guise of EU-wide borrowing and not just by members of the single currency zone, was the “lapel-grabber” for investors.

For typically sceptical markets, initial reactions were couched in “ifs” and “buts”, calls for more details on the split between borrowing and contributions to the fund, doubts about the spending time frame and wariness of the machinations of European politics in the run up to the May 27 presentation.

“There is still opposition within the EU and the scale is relatively small,” cautioned Paul Donovan, chief economist at UBS Wealth Management. But he said, “markets are focusing on the principle rather than the scale”.

There was no disguising market awareness of the significance – mostly in potentially averting an acrimonious slide towards euro disintegration over a lack of solidarity but also in addressing sticking points in euro integration that existed before the pandemic and will resonate long beyond.

“For the first time, the EU is allowing some sort of debt mutualisation,” Japanese bank Nomura told clients. “It could be a big moment in eventually lowering EU/euro break up risks.”

It’s a coup for pro-integrationists, such as Macron, who have long argued the euro can only be sustained long term if a single monetary policy and central bank are complemented by a common fiscal policy and treasury authority.

The pandemic has only sharpened that view.

It’s also potentially a big win for ECB chief Christine Lagarde in her mission to get euro members to rely more on fiscal policy for lifting the bloc’s growth than the almost exhausted single engine of the ECB’s monetary policy.

While 500 billion euros may seem small compared with the trillions in pandemic relief around the world, it’s still 3.5% of EU annual output and is earmarked as future fiscal stimulus rather than instant healthcare or lockdown relief – probably targeting existing priorities such as greener energy and the digital transformation of Europe’s economy.

What’s more, the AAA-rated Commission, backed by the EU’s 27 members, can probably borrow on the bond markets for free – or at least close to Germany, where prevailing 10-year bond yields are minus 45 basis points.

The bonds can also act as a long-sought common “safe” asset in Europe as well as being eligible for ECB purchases in its quantitative easing operations.

“Crucially it will take some pressure off the ECB from being the only backstop for markets, which should give investors some more comfort in re-engaging in European risk and not fearing as much the surge in issuance we are set to get from peripheral countries,” said Mohammed Kazmi, portfolio manager at UBP. ($1 = 0.9151 euros) (By Mike Dolan, Twitter: @reutersMikeD; Editing by David Clarke)

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