Stocks rebound on relief at Trump's response to China over Hong Kong

NEW YORK (Reuters) - A gauge of global equities rebounded and crude oil rose on Friday after U.S. President Donald Trump ordered an end to Washington’s special treatment of Hong Kong, a move investors welcomed as unlikely to jeopardize a trade accord with China.

Trump said China broke its word over Hong Kong’s autonomy but did not mention any action that would undermine the Phase 1 trade deal that Washington and Beijing signed this year.

China’s parliament on Thursday passed new national security legislation for the city, casting doubt on its freedoms and its future as a finance hub.

U.S. stocks pared losses after Trump’s remarks and oil gained on hopes the dispute will not curb the economy’s nascent recovery from the coronavirus pandemic.

The Dow Jones Industrial Average .DJI fell 17.53 points, or 0.07%, to 25,383.11, the S&P 500 .SPX gained 14.58 points, or 0.48%, to 3,044.31 and the Nasdaq Composite .IXIC added 120.88 points, or 1.29%, to 9,489.87.[.N]

Investors were worried about a further deterioration in Sino-U.S. relations, which have soured considerably through the COVID-19 pandemic.

“The market was worried he was going to announce something substantial, something detrimental to the U.S. economy. Then as he spoke it became clear the actions being taken were not going to be as dramatic as originally feared,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.

MSCI’s gauge of stocks across the globe .MIWD00000PUS gained 0.05%. In Europe, the pan-regional STOXX 600 index lost 1.44%.

Overnight in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.2%. Japan's Nikkei .N225 retreated from a three-month high and the yen rose to a two-week high of 107.06 against the dollar, while bonds rose.

The Chinese yuan CNY= weakened in offshore trade. [CNY/]

Hong Kong's Hang Seng index .HSI declined 0.8% and has lost about 3% in the two weeks since news of China's security legislation broke. [.HK]

The yield on benchmark 10-year U.S. Treasury notes US10YT=RR fell 0.651 basis points to 0.6526%.

Federal Reserve Chair Jerome Powell on Friday reiterated the U.S. central bank’s promise to use its tools to mitigate economic fallout from the pandemic, even investors were turning their attention to the next phase of its response.

MAY RALLY

Massive amounts of government stimulus helped lift global stocks in May, offsetting reams of grim economic data.

Equity markets have had difficulty gauging the pandemic’s impact on earnings. But data on Friday showed a record drop in U.S. consumer spending for the second straight month and the highest-ever saving rate, reflecting high levels of economic uncertainty.

Investors have been buying stocks as lockdowns have been lifted or eased, betting on a speedy recovery.

The S&P 500 .SPX gained around 4% for the month, making it the best May since 2009.

MSCI’s All Country World Index .MIWD00000PUS, which tracks stocks across 49 countries, was up around 3.5% this week - its best weekly performance since April.

The euro EUR= climbed above its 200-day moving average for the first time since late March as the European Union's 750 billion-euro coronavirus recovery fund fueled optimism. [FRX/] It was up 1.3% month-to-date against the greenback, last trading at $1.1097.

The dollar index =USD fell 0.178%against a basket of currencies.

U.S. gold futures GCv1 settled up 1.4% at $1,751.70 an ounce.

U.S. crude oil prices jumped more than 5%, while Brent, the international benchmark, edged higher. U.S. crude futures CLc1 rose $1.78 to settle at $35.49 a barrel, while Brent CLOc1 settled up 4 cents at $35.33 a barrel. [O/R]

Both contracts had their biggest monthly gains in years, supported by production cuts and optimism about demand recovery led by China.