Markets calmer to begin trading day, but U.S.-China threats loom large

World markets won a reprieve on Tuesday after three days of heavy selling that wiped trillions of dollars off the value of shares, as China vowed to "fight to the end" against additional U.S. tariffs imposed on Beijing. 

But less than a week since U.S. President Donald Trump unleashed sweeping reciprocal tariffs that sent world markets into a tailspin, the mood remained fragile.

The VIX stocks volatility index, often referred to as Wall Street's fear gauge, remained elevated at around 44 points — albeit off Monday's peak just above 60.

U.S. 10-year Treasury yields were steady after posting their biggest one-day jump in a year on Monday. Analysts said a number of reasons may have explained the sharp rise in U.S. bond yields on Monday including investors selling their most liquid assets to make up for falls elsewhere.

The American dollar, which has taken a beating from the tariff turmoil, remained weak against other major currencies. Safe haven currencies, including the yen and the Swiss franc, held near six-month highs to start Tuesday.

Japan's blue-chip Nikkei stock index closed six per cent higher, while in Europe shares rose from 14-month lows and markets in London, Paris and Frankfurt were up more than one per cent.

"Sentiment is rebounding, perhaps on the view that Trump may focus protectionism on China and speed up trade deals elsewhere," said Francesco Pesole, currency strategist at ING. "Markets may be erring on the optimistic side though."

China's markets rose only modestly after the country's sovereign wealth funds stepped in to buy shares. Chip-export-dependent Taiwan's benchmark tumbled five per cent, a day after suffering its worst fall on record.

The Chinese yuan fell to 7.3677 per dollar in the offshore market, the weakest in two months, before rebounding to be slightly stronger than Monday's close at 7.3393.

Trump dug in his heels over China, vowing additional 50 per cent levies if Beijing does not withdraw the retaliatory tariffs of 34 per cent it announced last week for the United States. If Trump sticks to his plan, total new U.S. duties on Chinese goods this year could rise to 104 per cent by Wednesday.

Trump imposed less expansive tariffs on China in his first term as president, some of which successor Joe Biden maintained.

But with global supply chains in jeopardy, Beijing is under pressure to respond.

"The U.S. side's threat to escalate tariffs against China is a mistake on top of a mistake, once again exposing the American side's blackmailing nature," China's commerce ministry said in a statement.

"If the United States insists on having its way, China will fight to the end."