Markets sag as hope fades for trade war detente

While equities are enjoying a recovery from Monday's sell-off, analysts warn of further volatility AFP / MOHD RASFAN

Investors' souring hopes for detente in the US-China trade war dragged stocks lower on Tuesday, putting a dent in the relief rally that started the week.

An inverted yield curve and worrisome economic data out of Germany also helped wipe away Wall Street's early gains, while results in Europe and Asia were mixed.

US President Donald Trump's repeated assertions that Beijing wants to make a deal to end the two countries' year-long trade war had cheered markets on Monday. But the optimism was short-lived, since Chinese officials did not confirm any new talks.

In Frankfurt and Paris, shares advanced solidly but London dipped as Brexit-weary British investors played catch-up after a three-day holiday weekend.

US Treasurys continued to fall, deepening the inversion of the curve between yields on the 2-year and the 10-year notes, a widely accepted sign a recession is likely.

China's beleaguered yuan nosedived to 7.1722 yuan to the dollar -- a level not seen since 2008.

The currency had plunged Monday on last week's news that Washington would hike tariffs on more than half-a-trillion dollars of Chinese imports, after Beijing unveiled levies on tens of billions of dollars of US goods.

Grim news from Germany

Chris Low of FTN Financial said investors were absorbing the reality that, despite Trump's rosy forecasts on Monday about the chances for a trade deal, the two sides were in fact no closer to an agreement.

"We've been barraged by comments from the Chinese side that nothing has changed," he told AFP.

He also pointed to unhappy economic news out of Germany, which recorded negative growth in the second quarter.

The news prompted fresh talk of a recession, with many saying growth could easily be negative again in the third quarter.

"Given that other data points for Germany in Q3 have been weak, there's every chance that we see another contraction and satisfy the definition of a technical recession," said David Cheetham at XTB.

Charles Schwab analysts said "early gains that came amid cooled trade tensions between the US and China fell victim to worries surrounding the persistent decline in bond rates, with the inversion between the 2-year and 10-year Treasury notes widening to heighten recession concerns."

In commodities, oil prices rose after Trump said he was prepared to meet Iran's Hassan Rouhani in the next few weeks, following talks over Tehran's nuclear program at the G7 summit.

"Expectations are... rising that tensions in the Gulf can be de-escalated following President Macron's overtures to broker a meeting between Donald Trump and his Iranian counterpart," noted AxiTrader analyst James Hughes.