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Stocks stumble as trade war nerves send yuan to 10-year low

[October 30, 2018] By Marc Jones

LONDON (Reuters) - European shares slipped back into the red and China's yuan hit a 10-year low on Tuesday, as the prospect of another escalation in the U.S.-Sino trade war compounded the recent gloom in global markets.

Asia had made modest gains overnight, thanks to hints of economic stimulus from Beijing, but Europe couldn't keep up the momentum as some disappointing company results and consumer spending data from France <.STOXX> triggered a 0.4 percent drop. [.EU]

It came on top of reports that Washington will impose tariffs on all Chinese imports by the end of the year without progress at next month’s meeting of Presidents Donald Trump and Xi Jinping.

The euro struggled near a 10-week low as the dollar climbed toward a 2 1/2-month high against a basket of the world's top six currencies.

It was the 10-year low for China's yuan in Asian trading that grabbed most attention, though, as it weakened to 6.9696 per dollar, stirring speculation over whether Beijing will tolerate a slide beyond 7 per dollar.

"We don't see the trade war being resolved any time soon," said Rabobank's senior macro strategist Teeuwe Mevissen. "And it comes at a time when we see all the sentiment indicators in the euro zone but also in the U.S., too, cooling down."

There was more negative news out of Italy, the other major concern for Europe at the moment, as its coalition government faces off with the European Commission over spending.

Data showed the Italian economy had ground to a halt in the third quarter as both domestic demand and trade flows failed to spur any growth.

The flat reading was the weakest since the fourth quarter of 2014 and renewed the pressure on Italy's government debt in the bond markets.

Italy's 10-year government bond yield was up 2.5 basis points at 3.36 percent, having been as low as 3.32 percent earlier in the session. <IT10YT=RR> The closely watched spread over German government debt was back up to 300 bps. <DE10YT=RR>

GLOBAL BEAR MARKET?

Asian shares rose in a choppy overnight session as China made a fresh attempt to stabilize its stock markets.

Beijing's securities regulator said it would encourage share buybacks and mergers and acquisitions by listed firms and would enhance market liquidity.

Mainland China's benchmark Shanghai Composite <.SSEC> and the blue-chip CSI 300 <.CSI300> gained to 1.0 percent and 1.1 percent, respectively, having fallen in early trading.

Japan's Nikkei average <.N225> also erased early losses and rose 1.5 percent as traders went shopping for bargains among beaten-down stocks. [.T]

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The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, October 12, 2018. REUTERS/Staff

MSCI's broadest index of Asia-Pacific shares <.MIAPJ0000PUS> has lost 12 percent this month and is on track for its biggest October decline since 2008, during the global financial crisis.

"At this point, nobody can say the equity market is bottoming out. Global investor sentiment remains shaky," said Yasuo Sakuma, chief investment officer at Libra Investments in Tokyo.

The speed with which a brief rally in U.S. stocks faded on Monday underscored that jittery mood.

Wall Street was pointing to a modestly higher open later, but the S&P 500 will be starting near a six-month low, having dropped almost 10 percent from last month’s record highs. [.N]

The chill around China and global trade means emerging- market stocks are at an 18-month low. MSCI's index is down for a sixth day in a row and Monday's post-election rally in Brazil was already in the rear-view mirror. [EMRG/FRX]

The CBOE Global Markets volatility index <.VIX>, known as Wall Street's "fear gauge", was down a touch, but it had jumped to as much as 27.86 points, its highest since Oct. 11 and the second highest since the volatility shock of early February.

"The probability of global stocks turning to a bear market is increasing," said Masanari Takada, cross-assets strategist at Nomura Securities.

In the main commodity markets, oil prices were mixed after easing overnight as Russia signaled that output will remain high and as concern over the global economy led to worries about demand for crude.

West Texas Intermediate crude futures <CLc1> edged up 0.1 percent to $67.13 per barrel. Brent crude futures <LCOc1> dipped 0.3 percent to $77.13.

Zinc and copper prices also dropped, along with other base metals, after U.S. President Trump's warning of new tariffs on Chinese goods.

Trump has said during an interview with Fox News that he thinks there will be "a great deal" with China on trade, but warned that he has billions of dollars worth of new tariffs ready to go if a deal is not possible.

(Additional reporting by Tomo Uetake in Tokyo)

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