Shares slip on fear of worsening US-China ties; gold surges

NEW YORK/LONDON: World equity markets slid and gold rose on Wednesday after the US ordered China to close its consulate in Houston, fanning fears of worsening bilateral relations, while the euro gained on the European Union's massive recovery fund.

Trading was choppy following the consolidation of recent equities gains in many bourses around the world. But the order for Beijing to shut its Houston consulate in three days spurred risk-off sentiment and drove investors to assets offering relative safety, such as gold and silver.

MSCI's benchmark for global equity markets fell 0.08% and the euro rose 0.35% to $1.1566, a 21-month high, a day after the EU approved a $750 billion euro ($857 billion) landmark stimulus package for the 27-nation bloc.

Silver jumped almost 8% to a six-year high of just over $23 an ounce before retreating slightly. The price of gold , which has topped $1,870 an ounce, has doubled since financial markets' frantic spiral downward in March. Spot prices are just $50 less than their all-time peak in September 2011.

Gold is seen as a hedge against inflation and fears of currency debasement as governments and major central banks pump massive stimulus into the economy.

But the question remains whether the US Federal Reserve has limited or even eliminated investors' needs to address market risk, said Yousef Abbasi, global market strategist at StoneX Group Inc.

"We face several different challenges and the tail risks are getting higher and higher," Abbasi said, pointing to US-China relations, the potential economic fallout from the coronavirus pandemic and uncertainty over the US presidential election.

"Yet the (stock) market continues to climb higher. And it's telling investors these risks don't need to be addressed," he said.

In equities markets, a boost from Microsoft shares and optimism over a new round of stimulus for the virus-stricken US economy offset worries over worsening ties between the world's two largest economies.

Europe's broad FTSEurofirst 300 index closed down 0.94% on US-China jitters, but on Wall Street the Dow Jones Industrial Average rose 0.31%, the S&P 500 gained 0.27% and the Nasdaq Composite dropped just 0.09%.

The dollar index, which gauges the dollar against a basket of major world currencies, fell 0.15% at $94.9830.

China's offshore yuan weakened past 7 per dollar on the Houston consulate news, and was last at 7.0128.

China Foreign Ministry spokesman Wang Wenbin told a regular daily news briefing that the United States had abruptly told Beijing on Tuesday to close the consulate.

US officials said the step had been taken to protect American intellectual property and information -- US media reports in Houston on Tuesday said documents were being burned in a courtyard at the consulate -- but Beijing condemned the order and threatened retaliation.

"We urge the US to immediately revoke this erroneous decision," China's Foreign Ministry said. A source later told Reuters that China was considering closing the US consulate in Wuhan.

In debt markets, Italy's government bond market borrowing costs were at their lowest since March on the improved EU recovery fund sentiment. Rating agency S&P Global called the joint debt element of the deal a boost for the EU's sovereign ratings.

"The story is not over yet, but the establishment of a shared fiscal mechanism is a breakthrough for EU sovereign creditworthiness," one of S&P's top sovereign analysts, Frank Gill, said.

Copper prices drooped 1.3% after the Houston headlines . Shanghai and Dalian iron ore futures rose for a second straight session on expectations of strong Chinese demand.

Brent crude futures slid 3 cents to settle at $44.29 a barrel. US crude futures settled down 2 cents at $41.09 a barrel.