Clear signals of a trade dialogue between China and the US prompted another U-turn in investor sentiment overnight. European shares finished lower, but North American indices turned from red to green around mid-session. The US dollar strengthened and bonds and gold slid as investors discounted the potential for a damaging trade war.

China’s retaliation to the second round of US tariff barriers unnerved European traders. However focus shifted to deferred starts to announced sanctions and the potential for a negotiated solution despite tough talk from both sides. In particular calls from US business groups for resolution calmed sentiment. Sanctions announced so far represent less than 10% of bi-lateral trade and of themselves are unlikely to significantly damage growth prospects.

The combination of lower fear, lower regional currencies and support for industrial commodities should mean gains for Asia Pacific investors today. PMI reads released in Australia this morning are also supportive, indicating economic expansion at higher rates than forecast. Australian trade numbers and Japanese investment data could also influence trade today.