ORLANDO, Florida, Sept 3 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

A rebound in U.S. tech stocks lifted the Nasdaq and S&P 500

on Wednesday, but soft U.S. employment indicators kept investors

on edge and sparked a rally in Treasuries and gold prices.

More on that below. In my column today, I look at the

surprising strength of China's yuan against the dollar in recent

weeks, and argue that it may be part of Beijing's wider strategy

in its trade negotiations with Washington.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. From Tokyo to London, bond investor fears over

fiscal

discipline leave markets on edge

2. Fed rate cuts and doubts over independence to

keep U.S.

dollar under pressure

3. Google's AI rivals get a boost from data-sharing

order,

but tech giant far from routed

4. China's Xi projects power at military parade with

Putin

and Kim

5. UK budget speculation adds to risks for the

economy

Today's Key Market Moves

* STOCKS: S&P 500 and Nasdaq rise after favorable

antitrust ruling for Alphabet. Nasdaq outperforms but Dow,

Russell 2000 slip.

* SHARES/SECTORS: Alphabet surges 9%, ConocoPhillips

-4.4%. Communications sector +3.8%, biggest rise since April;

energy -2.3%.

* FX: Dollar falls broadly. Biggest decline is a

0.5%

slide against Hungary's forint; in G10 FX space, greenback falls

0.4% against sterling and Aussie dollar.

* BONDS: European debt remains under pressure but

Treasuries rebound. U.S. yields fall as much as 7 bps, curve

bull flattens.

* COMMODITIES: A new high for gold at $3,578/oz. Oil

falls

2.5%, biggest fall in a month, as OPEC mulls output hike.

Today's Talking Points:

* U.S. jobs

This is a huge week for the U.S. labor market, and

therefore the Fed. Most observers agree conditions are softening

- the disagreement is over how rapidly, whether interest rate

cuts are warranted, and if so, when does the Fed act.

Figures on Wednesday showed job openings fell to a 10-month

low in July and there were more unemployed people than positions

available for the first time since the pandemic. Weekly claims

and July ADP private sector jobs data are out on Thursday,

before the big one on Friday - August non-farm payrolls.

* ECB

Euro zone price pressures may be a little hotter than

expected, with figures this week showing producer inflation in

July and consumer inflation in August above forecast. European

Central Bank board member Isabel Schnabel told Reuters there's

no need to cut rates.

Schnabel is at the hawkish end of the spectrum, but markets

don't disagree - the ECB is expected to stand pat next week and

all of next year. Further rate cut hopes are fading. Could the

next move, whenever it comes, actually be a rate hike?

* China flexes muscles

China held its largest-ever military parade on Wednesday to

mark 80 years since Japan's defeat in World War Two, with

President Xi Jinping telling the world it must choose between

"peace or war, dialogue or confrontation, win-win or zero-sum."

U.S. President Donald Trump called it a "beautiful ceremony".

The event was designed to flex China's diplomatic, economic

and tech muscle too, not just its military might. As many

countries agree to lopsided trade deals with the U.S., the

leaders of China, Russia and India are forging closer ties

between their nations.

China uses yuan as olive branch in U.S. trade talks

A notable trend this year has been the

often-counterintuitive market reactions to U.S. President Donald

Trump's efforts to upend many long-held economic norms. One of

the biggest surprises has been the appreciation of China's yuan.

The consensus opinion at the start of the year was that

Beijing would counter Washington's punitive tariffs on Chinese

imports by depreciating the yuan against the dollar. This would

keep Chinese goods competitive, enabling the country's exporters

to compensate for any loss of U.S. business.

On top of that, a weaker exchange rate would, in theory,

help to reflate China's economy, pulling it out of the

deflationary funk it has been in since its property bubble began

to burst in 2021.

And, finally, a weaker yuan would be a poke in the eye to

Washington. A key pillar of the Trump administration's economic

agenda, articulated most artfully by adviser Stephen Miran and

Treasury Secretary Scott Bessent, is a weaker dollar.

But Beijing surprised everyone.

The yuan did slide to an 18-year low around 7.350 per dollar

during the chaos of Trump's April 2 'Liberation Day' tariffs.

And combined with low domestic inflation and even deflation in

recent years, the yuan's broad 'real' effective exchange rate

(REER) is the weakest in over a decade.

But since April, it has reversed course rapidly against the

dollar, trading last week at a 2025 high of 7.1260 per dollar.

Indeed, measured by the People's Bank of China's official

daily fixings or offshore market trading, the yuan just posted

its biggest monthly gain against the greenback in almost a year.

These big moves can partly be explained by strong capital

inflows. The Shanghai Composite equity index is at a 10-year

high, boosted by record net inflows from hedge funds in August.

And even though China's trade surplus with the U.S. may be

shrinking, its global surplus in the first seven months of the

year hit a new record.

That's a recipe for a stronger exchange rate.

GOOD FAITH

But with a currency as tightly controlled as the yuan,

market dynamics are not the whole story.

The appreciation appears to be a deliberate policy choice by

Beijing, potentially hinting at its broader strategy in

combating Trump's tariffs.

On a basic level, this doesn't make sense. Given the

deflationary pressures still weighing on the Chinese economy,

why do authorities appear to be actively pursuing a stronger

exchange rate?

But when viewed as a negotiating tactic, the logic starts to

become clear. The Trump administration has explicitly stated

that it wants a weaker dollar - not a 'weak dollar', mind you -

but a currency level that would make U.S. exports more

attractive. And Beijing can help deliver this, especially given

that China's currency acts as an anchor for other regional

exchange rates.

Thus, the yuan's appreciation against the dollar indicates

that - despite China's show of force this week - Beijing is

still willing to negotiate with Washington.

'ANTI-INVOLUTION'

China may also want a firmer exchange rate to help ease some

domestic concerns, namely sluggish consumption.

The economic data coming out of China will do little to

support consumer sentiment or domestic demand: the latest

headline manufacturing PMI data was soft, new orders are

declining, and construction has contracted at its fastest rate

since the pandemic.

President Xi Jinping is clearly taking this seriously. He

has pledged to take steps to boost domestic consumption and

technological innovation, while supporting small firms. And he

has also spoken about breaking the cycle of "involution", a term

now widely used for excess competition and overcapacity.

An appreciating yuan should help these efforts because, as

all else being equal, a stronger currency should boost domestic

demand.

The yuan's recent rise against the dollar is thus "a policy

push, not a market pull," as Goldman Sachs analysts neatly put

it.

And given the foreign and domestic concerns China currently

faces, investors should not be surprised if Beijing keeps

pushing the currency higher, at least until the latest U.S.-Sino

tariff truce expires in November. A stronger yuan may be one

olive branch Beijing is still willing to offer.

What could move markets tomorrow?

* Australia trade (July)

* Malaysia interest rate decision

* Euro zone retail sales (July)

* Canada trade (July)

* U.S. trade (July)

* U.S. services ISM (August)

* U.S. ADP private sector employment (August)

* U.S. weekly jobless claims

* U.S. Senate Banking Committee hearing on Stephen Miran

nomination to Fed Board of Governors

* Federal Reserve officials scheduled to speak include New

York

Fed President John Williams, Chicago Fed President Austan

Goolsbee

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