Global Markets: New year stocks rally stalls as trade talks, data disappoint

By Marc Jones

LONDON (Reuters) - The early year rally in world stocks ran out of steam in Europe on Thursday and the dollar dropped to a near three-month low, as mixed signals from U.S.-China trade talks and caution at the Federal Reserve applied the brakes.

China said the three days of talks in Beijing had established a "foundation" to resolve the two country's differences, but gave virtually nothing in the way of details on key issues at stake.

A slew of weak data also dampened the mood. Again in China, factory-gate inflation was the slowest in more than two years, while worse-than-expected industrial figures in France provided more proof that Europe is spluttering again.

The pan-European STOXX 600 quickly lost 0.7 percent as Germany's trade-sensitive DAX dropped 0.8 percent and Britain's heavyweight FTSE 100 fell 0.5 percent on persistent Brexit concerns.

"I am beginning to get a little concerned about the path of the European industrial data," State Street Global Markets' head of strategy, Michael Metcalfe, said.

"It is raising the possibility of a technical recession in Europe. One of the big challenges is that if this is replicated in Italy's data tomorrow, that potentially brings the budget questions back into the market's thoughts."

The soured sentiment saw the normal move into safe-haven government bonds that give a guaranteed return. Yields on German and French and government bonds - which move inverse to price - dropped towards recent two-year lows.

The European Central Bank will publish the minutes from its December meeting later where it formal shuttered the mass bond buying programme it has been using in recent years.

U.S. Treasury yields last stood at 2.699 percent, down from 2.710 percent on Wednesday when Fed minutes showed policymakers were becoming more cautious about future rate hikes.

The dollar remained on the defensive too after hitting its lowest level since mid-October.

The greenback was down a tenth of a percent against the euro at $1.1556. The single currency gained 0.9 percent against the dollar during the previous session, its biggest one-day gain since late June.

China's yuan also muscled higher, breaching the 6.8 per dollar level for the first time since August in both onshore and offshore trade in Asia.

"This drop in the dollar is an overdue correction following a surprisingly robust few weeks despite the massive collapse in U.S. rate expectations," said Ulrich Leuchtmann, currency strategist at Commerzbank.

SLIPPY OIL

Asian shares had edged up overnight on the weaker dollar and hopes of more economic stimulus in China following its latest data disappointment.

But many stocks seesawed, and Tokyo and Shanghai both closed lower as markets parsed the trade talks and hoped that they will ultimately avert another ramping up of U.S. tariffs in March.

Oil also caught investors' attention as Brent and U.S. crude fell back $1 having jumped overnight on signs of OPEC-led crude output cuts.

Brent crude was last trading 1.4 percent lower at $60.58 a barrel and U.S. WTI was down 1.5 percent at $51.57 cents.

Chris Weston, Melbourne-based head of research at foreign exchange brokerage Pepperstone, said he viewed more gains in oil prices as a key driver for any further rise in risk appetite.

If U.S. crude futures can break through the $55 level, "you're going to see real yields probably lower. That's really good for the cost of money and taking some further headwinds out of the U.S. dollar," he said.

(Additional reporting by Tom Finn in London; Editing by Andrew Cawthorne)