China, Europe drag world stocks lower; dollar slips

By Natsuko Waki

LONDON (Reuters) - Europe and Asia dragged world equity markets lower on Monday as concerns about slower growth in China prompted investors to cut their risks.

The dollar slipped against major currencies as expectations that the Federal Reserve is in no rush to tighten policy kept the benchmark 10-year bond yield near last month's six-month low.

Shanghai shares hit a three-week low as Beijing announced regulations that tighten its grip on interbank lending and aim to defuse risks among "shadow" non-bank financial firms that act like banks. Fresh data also added to evidence of a cooling property market.

"Markets think any weakness (in the Chinese economy) from here will be met with a policy response from the authorities," said Manik Narain, strategist at UBS. "But there is room for China to disappoint."

The benchmark MSCI world equity index fell 0.1 percent while European shares lost 0.6 percent.

Emerging stocks outperformed their developed counterpart by rising 0.3 percent, approaching last week's 6-1/2 month high. Wall Street was heading for a weaker open with S&P futures down 0.3 percent.

The dollar fell 0.1 percent against a basket of major currencies while the euro ticked higher. The dollar fell to a 3-1/2 month low of 101.07 yen.

NO STRAIGHT LINE

European equity markets were dragged lower by British pharma group AstraZeneca, whose shares fell more than 13 percent after it rejected a sweetened "final" offer from Pfizer.

Deutsche Bank fell more than 2 percent after the lender unveiled plans to raise 8 billion euros ($11 billion) in new capital, in its third capital increase since 2010.

Deutsche's cap hike gives it the firepower for the investment banking push, especially in the United States, after a retreat by competitors Barclays, UBS and others left a gap that it aims to fill.

But it also underscores how the bank fell short of its ambitious turnaround targets and how burdensome fines and settlements and lagging profitability have hampered management efforts to fortify capital by retaining earnings.

European shares have been rallying in recent weeks on expectations that the European Central Bank would cut interest rates to support the economy.

"It's not going to be a straight-line recovery and people will lose confidence in it at times," Richard Marwood, senior investment manager at AXA Investment Management, said.

"But you've got a safety net (from central banks) and I still think the stocks market is a better place to be than the bond market."

The 10-year Irish government bond yield briefly fell towards last week's record low after Moody's upgraded Ireland's credit rating by two notches to Baa1.

"Ireland has come from being one of the weakest countries in the euro zone ... but now in an upwards rating cycle, Ireland should do better than its current peers," said Peter Schaffrik, head of European rates strategy at RBC.

Other peripheral yields in Italy and Spain rose as investors looked to book profits before European elections later this week. German Bund futures rose 7 ticks.

U.S. crude oil rose 0.6 percent to $102.67 a barrel.

(Additional reporting by Sujata Rao, John Geddie and Francesco Canepa; Editing by Ruth Pitchford)