By Marc Jones
LONDON (Reuters) – World stock markets hit a seven-day winning line on Wednesday as the White House took a tough line on trade negotiations with China, while an imminent reading on US inflation was set to deepen the odds of an early cut in interest rates there.
Europe's main markets and Wall Street futures both followed Asia lower. London, Frankfurt and Paris fell 0.4% to 0.6% when traders were trimmed in June near 4% gains.
Benchmark government bonds rallied as the warning returned. FX dealers kept the dollar close to an 11-week low as they were waiting to see if the US inflation number would strengthen its efforts on the first US price cuts since the financial crisis.
"I think we are very nervous waiting until next week's FOMC meeting says Saxo Bank's head of currency strategy, John Hardy,".
"You've got the markets to take out aggressive positions where the Fed will go and everyone is wondering if they are ready to deliver so much, in terms of guidance they have priced in."
Chinese inflation was also in the mix. The numbers overnight showed that it rose to a 15-month high of 2.7%, mainly due to the pungent pork prices. Excluding food, inflation only rose 1.6% and suggested much room for more stimulus.
The MSCI's widest Asia-Pacific index outside Japan had fallen 0.6% after two days of profits and after Wall Street's latest rally had stopped on Tuesday.
Japan's subdued 0.3% and Shanghai blue chips fell 0.7% after a 3% jump the day before.
Hong Kong's lost 1.7% as protesters stormed roads alongside authorities to protest against a bill that would allow people to be sent to China for trial.
"The effect was short-lived in the past," noted Alex Wong, head of the Ample Finance Group in Hong Kong. "This time, people will look at how the US responds to this type of news. The US attitude towards Hong Kong and China is not the same either."
President Donald Trump said on Tuesday that he was holding a trade agreement with China and had no interest in moving forward unless Beijing agreed to four or five "main points" which he did not specify. He said the rates were "too high" and the Federal Reserve had "no idea".
Fed policy makers will meet on June 18-19. As trade tensions increase, US growth slows down and in May decreases the markets priced in at least two reductions by the end of 2019. The future means an 80% chance of lowering the rate as early as July.
This may change depending on what US consumer price data shows later in the session. Main inflation is expected to slow to 1.9%, with the core rate steady at 2.1%.
Trump also worried about the foreign exchange market by tweeting that the euro and other currencies were "devalued" against the dollar and putting the US in a "major downside".
The euro rose to $ 1,1336, barely the last three months of $ 1,1347. The dollar fell against the yen to 108.25 and stayed on a basket of currencies at 96,608.
"The president's tweets on the USD have the potential to have a much more lasting impact over the coming election year," said Alan Ruskin, global manager of the G10 FX strategy at Deutsche Bank (DE :). "Global conditions are nicely set for what is colorfully described as a" currency war "or a currency bottom".
The Turkish lira weakened before a central bank meeting expected to leave Turkey's main interest rate unchanged at 24%. In the commodity markets, the average rate cut of gold kept nearly 14 months high at $ 1,335.51 per ounce.
Oil prices fell over 2% as concerns about a global downturn in economic slowdown that OPEC and its allies will expand their supply flows.
Hedge fund managers have liquidated housing equity oil positions at the fastest pace since the end of 2018, partly through increased financial fears.
Futures fell $ 1.4 cents to $ 60.87, but lost $ 1.2 to $ 52.10 a barrel.