LONDON (Reuters) – World equity markets rallied strongly on Friday as Asian markets rebounded on European equities after a turbulent sell-through week as investors became more apprehensive about higher barriers to trade.
The MSCI index for global stocks rose 0.5 percent at 0800 GMT, the strongest gain in three weeks, but the second quarter was still in the red as investors priced in US tariffs next week.
The US government is due to activate tariffs on Chinese goods valued at $ 34 billion on July 6, leading to a backlash from Beijing.
European equities rallied strongly, with the pan-European STOXX 600 up 1.2% and the trade-sensitive DAX up 1.5%.
But trade wars have already turned assets from the Chinese yuan into European automotive stocks, and have slashed the market capitalization of world stocks since June 12 by $ 1.75 trillion.
The euro jumped 0.5 percent to $ 1.1622 at 0800 GMT after leaders reached an agreement on migration at an EU summit.
"The outcome of the summit tells us something about the severity of the situation," said Jan von Gerich, chief analyst at Nordea in Helsinki.
"I am not confident that it will solve the underlying problems, but there was a fear that the summit would fail and we could get a collapse of the German government, so the risk premium is priced out," he said.
STOCKS GAIN, YUAN PAIN
As Asian stocks rallied, the Chinese yuan suffered its worst month, losing 3 percent against the dollar in June, as investors withdrew money from a market that was likely to suffer from higher trade barriers.
The Chinese yuan was down 6.6441 on Friday, its lowest level since November. He noted at 6:00 am to the dollar at 0800 GMT.
Chinese stocks rebounded from two-year lows, supported by news that Beijing would ease foreign investment cuts in sectors such as banks, automobiles, heavy industry and agriculture.
Despite Friday's gains, the CSI300 and the Shanghai Composite are the world's worst indexes this year.
In stark contrast to the yuan, the US dollar has been picking up the strongest quarterly gains since the fourth quarter of 2016, helped by the US Federal Reserve's June rate hike and expectations of further rate hikes this year.
The dollar index fell 0.5 percent to 94,924 and rose 0.1 percent to 110.65 against the yen.
European bonds diverged while the EU's Summit Migration Agreement pushed federal yields higher while 10-year government bonds fell to a weekly low in Italy.  The 10-year benchmark bond yield rose to 2.8547 percent and the yield curve widened slightly to 33.3 basis points.
Many investors see their flattening to record lows as a sign that the recession is imminent.
The heightening of fears over trade tariffs contrasted with a continued strong picture of the global economy and solid corporate earnings growth.
"Our assessment for this year was that investment markets would likely lag behind the real economy, as stronger growth momentum, stricter financial conditions, higher inflation and higher volatility would weigh on valuations, even though EPS trends remain solid", Morgan Stanley analysts said Thursday they lowered their index targets for MSCI Europe.
Oil prices came under pressure from the frictions of trading, although conditions on the crude oil market pushed prices down to a high of three and a half years on Thursday.
U.S. Crude oil was 0.4 percent lower at $ 73.19 a barrel. Brent crude rose 0.2 percent to $ 78.01 a barrel.
Gold remained close to 6 1/2-month lows, weighed by concerns about interest rates, interest rate expectations and the strong dollar. Spot gold rose 0.2 percent to $ 1250.78 an ounce, but still hit the worst monthly performance since November 2016. [GOL]
Emerging markets gained 1.6 percent, reaching a monthly low in the previous session. The index was set at the worst month since January 2016, as emerging markets were on the upswing.
Reporting by Helen Reid; Arrangement by Robin Pomeroy