LONDON -- Stock markets turned higher on Tuesday as China stabilized its currency after allowing it to depreciate against the dollar in response to President Donald Trump's decision to put more tariffs on Chinese goods.
The more buoyant tone follows a big sell-off Monday, when stocks were hammered after the Chinese government allowed its currency to depreciate against the dollar and was accused by the U.S. Treasury Department of being a currency manipulator. By lowering the value of the yuan, China can effectively offset the tariffs that Trump has imposed.
The fall in the yuan below the politically sensitive level of 7 to the dollar followed Trump's threat of tariff hikes on an additional $300 billion of Chinese imports and led to Monday's rout. Many stock indexes around the world recorded their worst day so far this year as fears mounted of an escalating trade war. In the U.S., the Dow Jones industrial average slumped 3%.
On Tuesday, the People's Bank of China fixed the yuan at a higher rate than anticipated, a move that helped Asian shares pull off lows and encouraged investors in Europe and the U.S.
"In pulling the yuan higher, it is not only looking to manage any decline, but also looking to contain any damage in terms of confidence in their stewardship of the Chinese currency and economy," said Michael Hewson, chief market analyst at CMC Markets.
"It also buys time for cooler heads to prevail when it comes to escalating events further."
Wall Street was set to open higher at the opening bell, with Dow futures and the broader S&P 500 futures up 1%.
Earlier in Asia, the Shanghai Composite Index declined 1.6% to 2,777.56 and Tokyo's Nikkei 225 gave up 0.6% to 20,585.31. Hong Kong's Hang Seng shed 0.7% to 25,976.24 and Seoul's Kospi was off 1.5% at 1,917.50.
The fallout of the latest trade war jitters weren't just felt in stocks. Gold, for example, hit a six-year high on Monday as investors sought it out as a supposed safe haven of value. On Tuesday, it was down only 0.1% to trade at $1,475 per ounce, a sign that investors remain risk-averse.
Other safe haven assets that saw big gains on Monday include U.S. Treasury bonds and the Japanese yen.
Trump's trade policies and how he responds to China's decision to not let the yuan fall further are likely to remain the key driver in markets in the days to come. Meanwhile, given the darkening economic picture, the Federal Reserve is increasingly expected to indicate that it is ready to cut interest rates again. Last week's rate cut, the first in over a decade, actually saw stocks slide as Fed Chairman Jerome Powell indicated that there may not be as many more to come in coming months as many investors think.
"This trade spat is going away no time soon, but we should see central bank easing bets rise globally and that will help limit some of the market carnage over the next couple weeks," said Edward Moya, senior market analyst at OANDA.
In energy markets, which often reflect expectations of global economic growth, the benchmark U.S. crude rose 55 cents on Tuesday to $55.248 per barrel in electronic trading on the New York Mercantile Exchange while Brent crude, used to price international oils, gained 35 cents to $60.17 per barrel in London.