Pakistan Prime Minister Imran Khan has called for ‘better sense’ to prevail in the tense Kashmir stand-off with India, which has rattled markets (AAMIR QURESHI)

Hong Kong (AFP) – Asian markets fluctuated Thursday as optimism over China-US trade talks was tempered by Donald Trump’s top negotiator, while investors also digested weak factory data from Beijing and fresh geopolitical tensions in Kashmir.

The global rally that has characterised most of this year took a knock after US Trade Representative Robert Lighthizer told lawmakers that “real progress” had been made with China, but a lot of work was still needed before a pact is signed.

While his comments did not derail expectations of an agreement at some point — with both sides reporting good progress and Trump delaying a deadline for a deal — it did give traders pause for thought, observers said.

Lighthizer said a “trade deal hasn’t been agreed yet, bringing some reality back to euphoric markets post-Trump’s tariff extension, despite the fact Lighthizer also announced both sides had agreed on an enforcement process”, said OANDA senior market analyst Jeffrey Halley.

After a negative lead from Wall Street, Asian markets swung Thursday and Tokyo went into the break 0.4 percent lower.

Hong Kong was up 0.4 percent mid-morning, Shanghai gained 0.3 percent, Sydney put on 0.2 percent and Wellington was up 0. 4 percent.

But Singapore slipped 0.5 percent and Seoul shed 0.2 percent, while Jakarta retreated 0.5 percent and Manila lost 0.7 percent.

Also fuelling selling pressure was figures showing Chinese manufacturing activity contracted for a third straight month in February, with factories hit by the long Lunar New Year break, concerns about slowing growth and uncertainty from the trade row.

– ‘Better sense’-

However, Zhou Hao, a senior emerging markets economist at Commerzbank AG, said the results were likely not as bad as they seemed and the outlook could be positive.

“I think we still want to wait for the next month’s reading as this month’s is distorted by the holiday,” he said.

“Also the economy could stabilise this month. Rising input prices suggest that there is no need to worry about deflation, so the question now rests on whether the economy has enough impetus.”

Nervousness continues to stalk trading floors after Pakistan and India said they had shot down each other’s fighter jets on Wednesday, fuelling worries of a conflict between the nuclear-armed neighbours.

The developments followed the February 14 suicide bombing by militants in the disputed Kashmir region that that killed 40 Indian troops.

Pakistan Prime Minister Imran Khan called for “better sense” to prevail.

“With politicians on both nuclear-armed sides making soothing comments overnight, the trick will be finding a mutually face-saving path to de-escalate the situation. Of course, this will be much easier said than done, and the potential for hostilities to ratchet higher remains very high,” Halley added.

On currency markets the pound held gains after touching a near eight-month high earlier Thursday after MPs gave Prime Minister Theresa May more time to work on her EU withdrawal deal after she promised they could delay Brexit if necessary.

Sterling was also given a boost after the opposition Labour Party said it would back a second referendum, having lost a vote on its own Brexit plan Wednesday.

– Key figures around 0230 GMT – 

Tokyo – Nikkei 225: DOWN 0.4 percent at 21,481.66 (break)

Hong Kong – Hang Seng: UP 0.4 percent at 28,878.20 

Shanghai – Composite: UP 0.3 percent at 2,963.34 

Pound/dollar: UP at $1.3310 from $1.3306 at 2150 GMT

Euro/dollar: UP at $1.1377 from $1.1372

Dollar/yen: DOWN at 110.88 yen from 111.00 yen

Oil – West Texas Intermediate: UP five cents at $57.99 per barrel

Oil – Brent Crude: DOWN eight cents at $66.31 per barrel

New York – Dow: DOWN 0.3 percent at 25,985.16 (close)

London – FTSE 100: DOWN 0.6 percent at 7,107.20 (close)

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