World shares slipped on Friday as a leading index strained for a record high, with investor nerves from Asia to Europe gnawing away over how or when the United States and China can agree a truce in their damaging trade war.
The MSCI All Country world index, which tracks shares in 49 countries, fell 0.2% to 548.48 points, short of a record 550.63 scaled in January 2018 before the eruption of tensions over trade between Washington and Beijing. European shares clawed back some ground after opening lower, but by late morning, the broad Euro STOXX 600 was down 0.1%, still near a four-year high.
Asia saw a somber session, with MSCI's broadest index of Asia-Pacific shares outside Japan falling 1.1%. Hong Kong led the dip, losing 2.1%. South Korean shares and Japan's Nikkei also fell. China's blue-chips gave up 0.9% a day before the country reports manufacturing activity, which analysts expect to have shrunk for seventh straight month in November.
The sell-off came as investors grew uncertain over how U.S. markets will perceive the latest clash between Washington and Beijing over Hong Kong. Wall Street will start a half-day session on Friday following Thursday's Thanksgiving holiday, with futures gauges suggesting losses of around 0.2%. China warned the United States on Thursday it would take "firm counter measures" in response to U.S. legislation backing anti-government protesters in Hong Kong.
"The more recent news on the trade front is how the Hong Kong situation might play into the U.S.-China trade negotiations," said Hugh Gimber, global market strategist at J.P. Morgan Asset Management. "The market is now waiting on the next clear steer on when investors might be able to expect a deal to be reached."
Markets rose through October and in November began to price in expectations of the two sides reaching an initial deal by the year-end, Gimber said, adding that has started to look less likely. Still, investors are on the whole betting it ultimately remains in the interest of both Washington and Beijing to move forward with talks to get a trade deal.
The MSCI world index has climbed 2.5% this month, its third straight month of gains, helped in part by hopes the world's two biggest economies are moving toward a resolution. The trade conflict has upset financial markets and disrupted supply chains. For the year, the index is up over 20% this year, helped by a lowering of interest rates and injections of government stimulus around the world.
In holiday-thinned trade, euro zone inflation data was the main piece of economic data in investors' sights. The data showed inflation accelerated faster than expected in November, likely comforting European Central Bank policymakers - even if some factors pushing up prices may be only temporary. The ECB will next meet on Dec. 12, with its loose policy stance not expected to change for months to come. Benchmark bonds in the bloc, including Germany's 10-year Bund yield, were little changed, trading off one-month lows hit the previous session.
QUIET ON THE DOLLAR FRONT
With few major news catalysts in the China-U.S. trade talks, major currencies stayed in tight trading ranges. Against a basket of six major currencies, the dollar traded flat at 98.387, and edged up slightly against the Japanese yen. In early London trading, the greenback reached 109.55 yen, not far off a six-month peak of 109.61 set on Wednesday.
"China has already threatened retaliation measures in reaction to the bill being passed, while it remains unclear for now what shape these will take," said Thu Lan Nguyen, a strategist at Commerzbank. "That means there is still the risk of a set-back short term."
The euro stood at $1.1005, and has been stuck in a tight range for the past week. As trading in major currencies slumbers, their implied volatilities, key gauges of expected swings measured by their option prices, plumbed record lows this week. Elsewhere, bitcoin gained 1.5%, with the original cryptocurrency on course for its worst month in a year.
Bitcoin had been heavily sold off by investors as expectations fade that China's embrace of blockchain would help cryptocurrencies enter the mainstream. Oil prices dipped, with investors awaiting a meeting of OPEC and its allies next week. OPEC watchers expect an extension to a pact to throttle oil output but no deeper cuts to be agreed by the producer group and its allies next week. Brent crude futures were down 44 cents, or 0.7%, at $63.43 a barrel.