Stocks retreat after grim China data, oil plummets

By David Gaffen

NEW YORK (Reuters) - Global markets got February off to a cautious start on Monday following a rocky January, with stocks and oil falling in the wake of weak manufacturing reports around the world.

U.S. and European stocks fell. Disappointing euro zone manufacturing data dovetailed with the fastest contraction in China's giant factory sector in over three years, and U.S. manufacturing sentiment remained weak.

Those surveys showed the new year began much as the old one ended, with too much capacity chasing too little demand. The U.S. Institute for Supply Management showed a bit of stabilization, but its sentiment survey was still below 50, the demarcation line for expansion versus contraction.

"The contraction in manufacturing is ongoing but no longer getting worse," said Steve Blitz, chief economist at ITG Investment Research in New York.

The Dow Jones industrial average fell 0.25 percent to 16,425.55, the S&P 500 lost 0.21 percent to 1,936.26 and the Nasdaq Composite dropped 0.07 percent to 4,610.58.

Oil prices, the other major factor influencing markets this year, also fell. U.S. crude was down more than 6 percent to $31.50, resuming a downtrend that had been interrupted recently on hopes for production cuts. Brent dipped as well, falling 5.3 percent to $34.07 a barrel.

"China is the last standing consumer of oil outside of the U.S. The problem is that everyone is relying on them," said Carl Larry, director of business development at Frost & Sullivan in Houston.

"As long as we keep in this scenario where China is the only real consumer to pick up the pace, we're going to see moves lower every time China has an issue with their economy."

Crude had jumped last week after Russian energy officials said Saudi Arabia had made proposals to manage output and was ready to talk. But a senior OPEC source told a Saudi Arabian newspaper Monday it was too early to talk a meeting to stem the persistent drop in prices amid a world glut.

Friday's surprise move by Japan to cut interest rates to negative levels continued to provide support for bonds. Japanese government bond yields hit record lows, and bets the European Central Bank will cut its rates again next month also sent German five-year bond yields to all-time lows. [GVD/EUR]

In the United States, however, bond prices were lower, with the 10-year benchmark yield rising to 1.95 percent.

The yen was steady at around 121.07 to the dollar and 131.95 to the euro . Friday's BoJ move set off its biggest one-day fall - roughly 2 percent - in over a year. [FRX/]

MSCI's 46-country All World share index , which lost over 6 percent last month in its worst start to a year since 2008, edged higher, gaining 0.3 percent.

Chinese stocks <.SSEC><.CSI300> slipped more than 1 percent after the weak data strengthened calls for more stimulus.

(Additional reporting by Lucia Mutikani in Washington, and Marius Zaharia, Karolin Schaps and Jemima Kelly; Editing by Bernadette Baum and Nick Zieminski)