Stocks, dollar edge higher as investors track US-China trade talk progress

By Lawrence Delevingne and Amanda Cooper

BOSTON/LONDON (Reuters) -Global stocks and the dollar were positive but muted on Tuesday as trade talks between the United States and China continued through a second day, giving investors some reason to believe tensions between the world's two largest economies may be easing.

U.S. Commerce Secretary Howard Lutnick said discussions between the two sides in London were going "really well" but may run into Wednesday.

Any progress in the negotiations is likely to provide relief to markets given Trump's often-shifting tariff announcements and swings in Sino-U.S. ties have undermined the two economies, disrupted supply chains and threatened to hobble global growth.

The World Bank on Tuesday slashed its global growth forecast for 2025 by 0.4 percentage points to 2.3%, saying that higher tariffs and heightened uncertainty posed a significant headwind for nearly all economies.

On Wall Street, the Dow Jones Industrial Average rose 0.25%, while the S&P 500 and the Nasdaq Composite both added about 0.6%. 

Shares of Wall Street's most valuable companies were mixed. Tesla TSLA.O added more than 5%, while Microsoft MSFT.O slipped 0.4%. Alphabet rallied 1.4% after Reuters reported that OpenAI plans to add Alphabet's Google cloud service to meet its growing needs for computing capacity.

World stocks, as reflected by the MSCI All-Country World index, traded near record highs, up 0.4%, while the dollar steadied against a range of currencies.   

"While market participants are clearly taking a glass half-full view of the outlook, both on trade policy and more broadly, we don't think that should be interpreted as a view that tariffs will be fully unwound," said Jonas Goltermann, deputy chief markets economist at Capital Economics.

Goltermann anticipates U.S. duties on Chinese goods to settle at around 40%, while most analysts have said the universal 10% levy on imports into the United States is here to stay.

In Europe, the STOXX 600 was little changed, constrained by UBS, whose shares dropped nearly 5% as investors worried about the impact of new government proposals to force the Swiss bank to hold $26 billion in extra capital. 

In Tokyo, Finance Minister Katsunobu Kato said policymakers were looking at measures to promote domestic ownership of Japanese government bonds, a day after Reuters reported that Japan is considering buying back some super-long government bonds issued in the past at low interest rates.

Japanese government 30-year yields were virtually flat at 2.92%, having retreated from late May's record high of 3.18%.

The yen fell about 0.2% to 144.9 versus the dollar, while the euro was little changed at $1.142. The pound dropped about 0.3% to $1.35 after weak UK employment data.

QUALITY NOT SIZE

Trump's fluid trade policies and worries over Washington's growing debt pile have dented investor confidence in U.S. assets, in turn undermining the dollar, which has already fallen more than 8% this year.

"It's not that the Americans are blowing up their fiscal situation because the deficit is going to remain more or less stable. But the quality of the deficit has degenerated," Samy Chaar, an economist at Lombard Odier, said.

"If you invest, and spend on productive investments, you'll get macro payoffs, because you're going to develop an industry, you're going to strengthen your economy, you're going to create jobs, you have a payoff. If you spend by basically reducing revenues because you cut taxes on people who don't need the money, they won't be consuming more, or investing more, so the macro payoff is more limited," he said.

U.S. Treasuries were little changed, with the 10-year yielding around 4.47%, down 1 basis points on the day. U.S. Treasury auctions of notes and bonds this week are even more in focus than usual as tests of market sentiment on U.S. assets.

Data on U.S. consumer inflation for May due out on Wednesday could show the impact of tariffs on goods prices. 

The producer price index report will be released a day later.

"May's U.S. CPI and PPI data will be scrutinised for signs of lingering inflationary pressures," said Convera's FX and macro strategist Kevin Ford.

"If core CPI remains elevated, expectations for rate cuts could be pushed beyond the June 18 FOMC meeting."

Traders expect the Federal Reserve to leave rates unchanged at its policy meeting next week. Just 44 bps worth of easing have been priced in by December.

In commodity markets, oil prices held near a seven-week high on Tuesday as the market awaited direction from trade talks between the U.S. and China. Brent crude futures LCOc1 slid 17 cents, or 0.3%, to settle at $66.87 a barrel, while U.S. West Texas Intermediate crude CLc1 fell 31 cents, or 0.5%, to settle at $64.98.

Spot gold dipped 0.03% to $3,326 an ounce.

(Reporting by Lawrence Delevingne in Boston and Amanda Cooper in London; Additional reporting by Rae Wee and Johann M. Cherian; Editing by Mark Potter, Deepa Babington, Nia Williams and Sandra Maler)