* Europe drops after world stocks hit record high in Asia
* Safe-harbour bonds and yen make ground
* Rand and lira take the pain in emerging markets
* World FX rates in 2020 tmsnrt.rs/2egbfVh
LONDON, Jan 14 (Reuters) - Europe’s markets were struck by a bout of weakness on Tuesday, as traders cashed in on recent record highs and waited for a long-awaited U.S.-China trade deal and the first flurries of the Wall Street earnings season.
It had been smooth sailing in Asia. MSCI’s world stocks index set a new record high after reassuring Chinese data and Washington had said it no longer deemed Beijing a currency manipulator, but Europe’s open saw the currents turn.
Dealers struggled to put their finger on the exact cause but London, Frankfurt and Paris all took an early dip to leave the regional STOXX 600 as much as 0.5% lower and bonds and other safe-haven assets suddenly back in demand.
“You had some good news in terms of China coming off the list of currency manipulators and so you would have expected bond prices to extend losses,” said Andy Cossor, a rates strategist at DZ Bank in Frankfurt.
“So, I think it might be a case that people got ahead of themselves yesterday and are covering short positions.”
A number of heavyweight emerging market currencies were on the ropes too. The highly-sensitive South African rand hit a three-week low and Turkey’s lira took its biggest tumble since mid-December.
China’s yuan also backed off its highest since July hit overnight after the U.S. Treasury Department on Monday said China should no longer be designated a currency manipulator - a label it applied as the yuan dropped in August.
Beijing, meanwhile, had given its approval too by fixing the yuan’s official trading-band midpoint at its firmest in more than five months.
China has also pledged to buy an additional almost $80 billion of U.S. manufactured goods over the next two years, plus more than $50 billion extra in energy supplies, according to a source briefed on a trade deal.
The change in the mood in Europe had also come as Wall Street and other U.S. futures turned lower after their latest record highs on Monday.
The moves coincided with the arrival of a Chinese delegation in Washington ahead of Wednesday’s signing of the Phase 1 trade agreement, seen as calming a dispute that has upended the world economy.
“There have been a number of false starts,” said Vishnu Varathan, head of economics at Mizuho Bank in Singapore.
“The fact that this is really coming to the moment when the rubber hits the road is the most tangible evidence of traction in starting to resolve issues, that’s what’s driving optimism.”
In contrast to Europe’s swoon, Japan’s Nikkei had added 0.7% overnight to hit its highest in a month. Australian shares rose by the same margin to close at a record.
Hong Kong’s Hang Seng and Shanghai blue chips also hit multi-month peaks before running out of steam.
United States Trade Representative Robert Lighthizer told Fox Business late on Monday that the Chinese translation of the deal’s text was almost done. “We’re going to make it public on Wednesday before the signing,” he said.
In tandem with the swings, gold began to claw off a two-week low, although it was still around 0.3% weaker for the day as a whole at $1543 per ounce.
Ten-year Treasury note yields dropped a couple of ticks 1.8354% compared with the 1.85% they had been at in Asia.
In currency markets, the yen also stabilised after weakening past the 110 yen-per-dollar mark, and the Swiss franc was marginally higher against a lifeless euro.
Besides the trade deal, investors are also looking to U.S. inflation data due at 1330 GMT - with consensus expectations for it to hold steady at 0.2% in December - and the beginning of the fourth-quarter U.S. company results season.
Big banks JPMorgan Chase & Co, Citigroup Inc and Wells Fargo & Co are due to report earnings before market open on Tuesday.
Additional Reporting by Tom Westbrook in Singapore and Dhara Ranasinghe in London, Editing by William Maclean
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