China jitters send stocks tumbling

By Marc Jones

LONDON (Reuters) - World stocks and commodity prices tumbled on Tuesday, as poor Chinese data saw fears about its economic health intensify.

After a few upbeat days for world markets, concern about China revived after surveys showed its manufacturing sector shrinking at its fastest pace in three years and its services sector also cooling.

Asian stocks, particularly in Japan and Australia, fell overnight, and the gloomy mood extended to Europe. The FTSEurofirst 300 dropped 2.3 percent, following its worst month in four years.

Futures prices also pointed to Wall Street opening 2 percent lower. Oil fell back $1.5 towards $50 a barrel, halting biggest three-day surge in 25 years.

"The problem is that we have these brief spells of optimism like we had last week when U.S. GDP was revised up, but the overall theme is still the weakness in China and that is very hard to dispel from markets," said Philip Marey, a strategist at Rabobank in the Netherlands.

While shares and commodities remained the focus, the mood was similarly wary in the currency and bond markets.

The safe-haven Japanese yen and the low-yielding euro both rose against the dollar, to 120.16 yen per dollar and $1.1323 to the euro.

Gold, another favourite of investors during periods of uncertainty, was up at $1,143 an ounce. It had risen 3.5 percent in August, its best month since January.

The head of the International Monetary Fund, Christine Lagarde, summed up the situation in a speech in Indonesia, where she said global economic growth was now likely to be weaker than had been expected just a few months ago.

She cited both a slower recovery in major advanced economies and a further slowdown in emerging nations and highlighted the need to "be vigilant for spillovers" from China's stutters.

"The transition (in China) to a more market-based economy and the unwinding of risks built up in recent years is complex and could well be somewhat bumpy," she added.

CAUTION! FRAGILE CHINA

The latest bout of volatility was kicked off by losses on Wall Street, after comments by Federal Reserve Vice Chairman Stanley Fischer appeared to keep alive chances of a U.S. interest rate increase in September.

China's official Purchasing Managers' Index (PMI) then compounded matters, falling to 49.7 in August from the previous month's reading of 50.0, its weakest showing in three years and below the 50 mark that separates expansion from contraction.

"Recent volatilities in global financial markets could weigh on the real economy, and a pessimistic outlook may become self-fulfilling," said He Fan, chief economist at Caixin Insight Group. A separate survey from Fan's organisation had also shown the country's services sector slowing.

MSCI's broadest index of Asia-Pacific shares excluding Japan lost 1.9 percent to extend the more than 10 percent it had lost in August.

The Shanghai Composite Index fell 1.2 percent, but the CSI300 index was almost flat.

The pain was felt elsewhere. Japan's Nikkei had slumped 3.8 percent after losing 8.2 percent in August. Australian, Indonesian and Hong Kong stocks were all down by more than 2 percent.

Russia's rouble was among the hardest-hit emerging market currencies as the price of oil fell. Gulf stocks and metals markets were hurt as well.

London Metal Exchange copper fell almost 1 percent to $5,087.50 as markets reopened after a long holiday weekend. Nickel slid 2 percent and aluminium skidded as well.

Another recent victim of the China jitters, the Australian dollar, edged up. It gained about 0.2 percent to $0.7125 after the Reserve Bank of Australia held Aussie interest rates steady.

(Additional reporting by Lisa Twaronite in Tokyo; Editing by Larry King)