July 3, 2018 / 9:20 AM / 19 days ago

GLOBAL MARKETS-World stocks rise off 2-1/2 month low, China soothes currency markets

* Trade war concerns grow as July 6 U.S. tariff deadline nears

* Shanghai stocks at 2-yr low, HK down 3 pct before edging up

* Chinese yuan slips past 6.7; recovers after reported intervention

* European shares, euro rise after German compromise on migration

* Wall Street set for another firmer session on tech

* Turkish lira falls as inflation rises to 14-yr highs

By Sujata Rao

LONDON, July 3 (Reuters) - World stocks rose on Tuesday, supported by gains in Europe and three straight days of tech-driven rises in the United States, even though markets across Asia and especially China remained in the grip of trade turbulence.

Wall Street was set for another firmer session as investors positioned for strong Silicon Valley earnings before the reporting season starts next week, while European shares also rose after a deal on settling a migration policy row that had threatened Germany’s coalition government.

But a July 6 deadline is looming for Washington to impose tariffs on $34 billion worth of Chinese goods that Beijing has vowed to match with tariffs on U.S. products. President Donald Trump also threatened on Monday to “do something” if the United States was not better treated by the World Trade Organisation.

The prospects of a full-blown trade war and relentless yuan weakening — it has fallen 5 percent in the past two weeks to 10-month lows — reportedly forced China into intervention via state-run banks.. The currency then reversed earlier losses to move back into positive territory for the day against the dollar.

“It is by far the biggest (yuan loss) I can remember. Prudence suggests it has to be matched across South East Asia because of the competitive implications,” Bank of New York Mellon strategist Neil Mellor said.

“So if you have all these currencies weakening and the dollar strengthening against other emerging markets currencies as well, it generates a degree of instability in the market simply by virtue of its scale.”

Other Asian currencies weakened, especially those such as the Indonesian rupiah that are doubly exposed — to trade and oil prices approaching $80 a barrel.

On equity markets, Hong Kong dived as much as 3.3 percent at one point to nine-month lows, hit also by a U.S. move to block China Mobile from offering services to the U.S. market. Shanghai’s bourse hit a 2-year trough though both indexes inched higher towards the close as the yuan recovered. Japan’s Nikkei edged to a near three-month closing low.

The mood was more cheerful in Europe where a pan-European equity index rose half a percent, the euro firmed marginally and bond yields rose after German Chancellor Angela Merkel struck the deal with her Bavarian conservative coalition partners.

“The agreement between Chancellor Merkel and German interior minister Horst Seehofer should see German political risk fade into the background as a downside risk for the euro in the near-term,” MUFG analysts told clients.

Equity futures for the U.S. S&P500 and Nasdaq indicated a firmer session after Wall Street ended higher on Tuesday for the third day in a row. Gains of around 1 percent in tech firms such as Microsoft and Apple offset concerns about trade and its impact on growth.

Tech shares have been relatively resilient to trade fears - the New York Stock Exchange’s index of 10 tech giants including China’s Alibaba has gained over 30 percent this year. They are seen delivering another set of robust quarterly earnings.

That helped MSCI’s world index to rise 0.2 percent, inching further off recent 2-1/2 month lows.

CENTRAL BANKS AND CURRENCIES

While U.S. growth and company earnings seem unassailable, tit-for-tat tariffs from China and Europe may ultimately prove detrimental for American businesses and jobs.

U.S. Treasury bond yields rose slightly amid the easier mood but concern about the trade row has pushed the gap between two- and 10-year yields to the narrowest since 2007

“The recent intensification of global trade tensions imply the probability of trade conflict has risen to levels that could result in significant pain in financial markets and a sizable drop in output and employment,” Deutsche Bank wrote.

The dollar retreated 0.4 percent against a basket of currencies and the easing tensions in Germany helped the euro to gain 0.2 percent against the greenback.

But those most exposed to trade such as the Australian dollar and emerging currencies remain under pressure — the Aussie, considered a liquid proxy for China-related risk, was close to 1-1/2-year lows against the greenback

The Reserve Bank of Australia (RBA) kept rates at a record low 1.5 percent on Tuesday and showed no hint of raising them soon. Its governor cited “the direction of international trade policy in the United States” as an uncertainty.

The Turkish lira, seen as an emerging markets weak link, fell more than 1 percent after data showed June inflation accelerating to 14-year highs, hit by oil prices and the pass-through from currency weakness .

Additional reporting by Tomo Uetake in Tokyo, Marc Jones and Tricia Wright in London; editing by David Stamp

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