European stocks rallied on Wednesday, reversing an earlier loss as fears of a full-blown global trade war eased after U.S. President Donald Trump softened his harsh tone on Chinese investments in the U.S.

The Stoxx Europe 600 index SXXP, -1.02% rose 0.7% to close at 379.97, after being down as much as 0.8% earlier in the day.

The U.K.’s FTSE 100 index UKX, -1.29% gained 1.1% to 7,621.69, while Germany’s DAX 30 index DAX, -0.28% climbed 0.9% to 12,348.61. France’s CAC 40 index PX1, -0.82% advanced 0.9% to 5,327.20.

The euro EURUSD, +0.09% fell to $1.1584 from $1.1649 late Tuesday in New York. The pound GBPUSD, +0.27% extended losses, trading at $1.3144 from $1.3222 late Tuesday, after the Bank of England released its Financial Stability Report.

What is driving the market

European stocks erased their losses in midday trade after reports the Trump administration has backed away from invoking executive authority to impose a tough crackdown on Chinese investments in the U.S. A senior administration official said Trump will rely on existing laws rather than alternative, harsher measures that were feared to spark a dispute between Washington and Beijing.

Stocks in Europe had opened in negative territory on Wednesday as investors grew increasingly concerned over ever-increasing tensions between the U.S. and China over trade. Worries that Europe will get caught in the crossfire have led investors to pull billions of dollars from European equity and bond funds in recent weeks, The Wall Street Journal reported. The European Union itself is also embroiled in a trade spat with the U.S.

Read:Harley-Davidson isn’t riding off to Europe simply because of the Trump tariffs

Investors were taking note of an unconfirmed report on Wednesday from SGH Macro Advisors that President Xi Jinping has warned his cabinet to get ready for a “full-scale trade war” and that the People’s Bank of China may be ready to pare back or even cut purchases of U.S. Treasurys.

What are strategists saying?

“Risk-sensitive assets staged a sharp relief rally after starting the day on the back foot as concerns over trade wars eased,” said Fawad Razaqzada, market analyst at Forex.com, in a note.

“The reversal came after news emerged that Donald Trump had softened his tone on Chinese investments and won’t invoke national emergency law on China despite reports earlier in the week suggesting he was preparing more rigorous restriction,” he added.

Which stocks are in focus?

Shares of BASF SE BAS, -0.02% ended up 1.6%, erasing an earlier loss that came after the European Commission said it has opened an in-depth probe into the German chemical company’s proposed takeover of Solvay SE’s SOLB, -1.33% nylon business.

Banks were down across the board, with shares of Deutsche Bank AG DBK, +0.44% DBK, -0.12% falling to an all-time low, down 1.7%.

Energy companies rallied as oil prices continued their march higher. West Texas Intermediate crude US:CLQ8 rose 3.5% to $73 on Wednesday, trading around its highest level since November 2014, after U.S. supply data showed a larger-than-expected drop in stockpiles.

Shares of Tullow Oil PLC TLW, -3.72% jumped 8.1%, TechnipFMC PLC FTI, -5.15% climbed 5.4% and BP PLC UK:BP BP, +0.39% added 3.4%.

Which economic data is in view?

French consumer confidence unexpectedly fell in June, hitting its lowest level in nearly two years, statistics agency Insee reported Wednesday.

The recovery in eurozone bank lending continued, as lending to nonfinancial corporations grew at an annual rate of 3.6% in May, according to a European Central Bank report. That marks the highest rate since May 2009.