By Tommy Wilkes and Dhara Ranasinghe
LONDON (Reuters) - Stock markets clawed themselves off their lows on Monday but sentiment remained fragile after the latest flare-up in the U.S.-China trade war sent investors scrambling into government bonds and battered emerging market currencies.
European equity markets had looked set to follow Asian markets deep into the red but recovered when U.S. President Donald Trump moved to ease tensions with China after more tariffs - abruptly announced on Friday - deepened concerns about the impact of the conflict on global growth.
Speaking on the sidelines of a summit of major industrialized nations in France, Trump hailed Chinese President Xi Jinping as a great leader and said he welcomed his desire for a trade deal and for calm - soothing investors' nerves. Beijing called for calm.
Wall Street futures rallied, with S&P 500 e-minis up 0.5% ahead of the open.
European stock markets were mixed, with the pan-European Eurostoxx down marginally on the day. Germany's DAX rose 0.29% while France's managed a 0.5% rise. London markets were closed for a holiday.
Stocks had fallen sharply in Asia before Trump spoke as investors panicked that the latest tit-for-tat tariffs would damage global growth. On Friday, Trump announced an additional duty on some $550 billion of targeted Chinese goods, hours after China unveiled retaliatory tariffs on $75 billion worth of U.S. goods.
The MSCI world equity index, which tracks shares in 47 countries, remained 0.3% lower by 1205 GMT.
"Trump is clearly potentially exposed to a slower U.S. economy impacting his capability to be re-elected. He is aware of this and so reacts to market volatility with some kinder words," said Chris Bailey, European strategist at Raymond James.
"The Chinese have seen him blink and have filed this away for use later. Shorter-term I think this is the basis of some tentative deal," he added.
Despite the more positive tone in stock markets, assets deemed safe havens remained well supported. The 10-year U.S. Treasury bond yield hit a new 3-year low at 1.449% before rising to 1.518% - still a touch lower on the day.
It is down some 50 basis points so far this month.
The price of gold, which has risen sharply in recent months as nervous investors flocked to the precious metal, touched its highest since April 2013 and was last up 0.3% at $1,531.
Germany Bund yields did reverse their earlier falls. The 10-year bond rose 1 basis point to -0.664%, having earlier dropped to as low as -0.70%.
YUAN HITS 11-YEAR LOW
Emerging market currencies were among the biggest casualties of the latest trade war-induced volatility.
China's yuan plunged to an 11-year low in the onshore market and hit a record low in offshore trading
Turkey's lira dropped more than 1% to more than 5.8 against the dollar on Monday after briefly sliding to 6.47 in what market watchers described as a "flash crash" as Japanese investors slashed their exposure to riskier assets.
The lira was last down 0.8% at 5.8130.
Elsewhere in currency markets, the safe-haven Japanese yen rallied to a new seven-month high of 104.46 yen per dollar before reversing those gains to trade down 0.5% at 105.86 as calm returned to markets.
The dollar rose broadly and was up 0.2% versus the euro at $1.1117.
As investors try to navigate the year-long trade conflict between the world's two biggest economies, some are choosing to cut their exposure to stocks believing the battle is taking its toll on global growth.
"Downside risks are increasing for both the global economy and markets," said Mark Haefele, global chief investment officer at UBS. "As a result, we are reducing risk in our portfolios by moving to an underweight in equities to lower our exposure to political uncertainty."
German business sentiment deteriorated more than expected in August to hit its lowest since November 2012, a survey by Germany's Ifo Institute showed on Monday.
The latest trade escalation overshadowed a pledge by Federal Reserve Chair Jerome Powell last week to "act as appropriate" to keep the U.S. economy healthy, although he stopped short of committing to rapid-fire rate cuts.
Markets are now fully priced for at least a quarter-point cut from the Fed in September and more than 120 basis points of easing by the end of 2020.
Oil prices, which had earlier fallen on concerns the tariff dispute would crimp world demand, recovered in European trading.
(Graphic: World FX rates in 2019 http://fingfx.thomsonreuters.com/gfx/rngs/GLOBAL-CURRENCIES-PERFORMANCE/0100301V041/index.html)
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