Bears prowl world markets, maul Chinese stocks as trade tensions simmer

By Sujata Rao

LONDON (Reuters) - A 2 percent slide in Chinese equities on Wednesday and a fresh weakening in the yuan highlighted mounting stress on the world's number two economy from trade tensions with the United States, while global stocks slipped to approach two-month lows.

Equity futures signalled a weaker opening for Wall Street, with S&P e-minis down 0.4 percent following sharp losses in Asia and Europe after news the U.S. House of Representatives had approved tightening foreign investment rules.

The Nasdaq and Dow Jones indexes also are poised to open lower.

And while the prospect of trade protectionism and tit-for-tat tariffs hammers equities and raises fears for the world economy, the growth and inflation outlook is further complicated by oil prices rising back above $75 per barrel, due to Washington pressuring its allies to halt Iranian imports.

Oil's rise, despite last week's deal by crude producers to raise output, had helped Wall Street rebound on Tuesday. But the rally fizzled in Asian trading, driving MSCI's ex-Japan Asian equity index almost one percent lower to a fresh two-year low.

Losses were led by China, where Shenzen-listed blue chips sank 2.2 percent to stand a whisker above 13-month lows. Chinese equities have now fallen into so-called bear market territory, having tumbled 20 percent from recent peaks.

The yuan too slipped to a fresh six-month low against the dollar, as the central bank allowed the biggest one-day weakening in the currency in percentage terms since January 2017. Many analysts now see authorities allowing currency weakness in order to counter the hit to trade.

In contrast, the S&P500 is just 6 percent off peaks.

"After a lot of sabre-rattling, we are seeing Shanghai suffering a lot more than Wall Street, so clearly the first round (of trade war) has been won by America. Unfortunately, that then overflows into emerging markets and Europe," said Peter Lowman, chief investment officer at UK wealth manager Investment Quorum.

Lowman said a ten-year equity bullmarket had left many assets "priced for perfection", meaning setbacks could have an outsize impact, especially because central banks, led by the U.S. Federal Reserve, are tightening policy after years of ultra-low interest rates.

"Oil trading near $80 is going to put pressure on inflation around the world which means central bank policy may have to tighten quicker than expected," Lowman added.

The Iran supply worries have overshadowed a supply increase agreed by OPEC and other oil producers last week, pushing Brent futures more than half a cent higher to $76.8 a barrel

European shares, meanwhile, touched 11-week lows, later recouping some losses as auto shares, vulnerable to U.S. tariffs, trimmed some big early falls.

Many investors still caution against reading too much into the trade fallout, citing robust global growth and hopes of an ultimately pragmatic approach by leaders on the trade issue.

"We still have fundamental macro drivers. It's very much a push-pull between fundamentals mattering more versus political factors," Kristina Hooper, global chief market strategist at Invesco, said.

Nevertheless, trade-sensitive assets including currencies continue to feel the heat -- the Australian dollar traded towards one-year lows hit recently and the New Zealand dollar touched seven month lows to the U.S. dollar.

The greenback itself, recovered from 10-day lows, but fell 0.25 percent against Japan's yen which is considered a safe-haven asset.

Safe-haven bonds also gained from the turmoil, with 10-year Treasury yields slipping 3 basis points to around 2.84 percent, a near-one month low.

But fears of an inflationary impact from the trade tensions and oil prices, have flattened the yield curve, with the yield gap between two- and 10-year Treasuries narrowing to a new decade-low.

Political concerns in Europe are also worrying investors at the margin as a row over migration policy in Germany's coalition government rumbled on, raising concerns that the euro zone's biggest economy could be headed for snap elections.

That also contributed to pushing euro zone yields lower, with German yields edging towards one-month lows.

(Reporting by Sujata Rao; Additional reporting by Helen Reid in London and Wayne Cole in Sydney; Editing by Toby Chopra)