Asian stocks on edge over escalation in US-China trade tensions

TOKYO (Reuters): Asia shares recouped early losses and crept higher on Tuesday as China made a fresh attempt to stabilise its stock markets, but the gains looked fragile amid fears of a sharp escalation in the US-China trade war.

Major US indexes fell sharply on Monday after a Bloomberg report that the United States is preparing to announce tariffs on all remaining Chinese imports by early December if talks next month between presidents Donald Trump and Xi Jinping falter.

Trump had raised the possibility of such a move previously, but had not indicated a timeframe.

MSCI’s broadest index of Asia-Pacific shares outside Japan swung in and out of negative territory in morning trade and was up 0.2% by midday.

The index has lost 12% this month and is on track for its biggest October decline since 2008, during the global financial crisis.

Mainland China’s benchmark Shanghai Composite and the blue-chip CSI 300 were also choppy, falling in early trade before rising 0.7% and 1.0%, respectively, by midday.

China’s securities regulator said it would encourage share buybacks and mergers and acquisitions by listed firms, and would enhance market liquidity, in the latest attempt to put a floor under the country’s skidding equity markets.

Japan’s Nikkei average also erased early losses and advanced 1.3%. Traders said investors were looking for bargains among beaten-down stocks.

“At this point, nobody can say the equity market is bottoming out. Global investor sentiment remains shaky,” said Yasuo Sakuma, chief investment officer at Libra Investments in Tokyo.

The CBOE Global Markets volatility index, known as Wall Street’s “fear gauge”, jumped to as much as 27.86 points, its highest since Oct. 11 and the second highest since the volatility shock of early February.

“The probability of global stocks turning to a bear market is increasing,” said Masanari Takada, cross-assets strategist at Nomura Securities.

“While some investors who look at fundamentals buy stocks on dips, there are other players who keep selling automatically in response to heightened volatility. At times like this, buyers can easily be overwhelmed by negative headlines on tariffs, etc.”

Adding to the jitters, China’s yuan continued to weaken, drawing closer to a closely watched support level.

In onshore trade, the yuan slipped 0.1% to 6.9724 per dollar, a more than 10-year low, stirring speculation over whether the central bank will tolerate a slide beyond the key level of 7 per dollar.

Major state-owned Chinese banks were seen swapping yuan for dollars in forwards on Tuesday, but there was no immediate evidence of dollar selling in the spot market as the currency neared a key support level, three traders said.

The dollar index against a basket of six major peers inched higher and was just below its 10-week high it hit on Friday. The index gained on a decline in the euro after news German Chancellor Angela Merkel would not seek re-election as head of her CDU party.

Merkel said she would not seek re-election as party chairwoman, heralding the end of a 13-year era in which she has dominated European politics.

Oil prices were mixed after easing overnight as Russia signalled that output will remain high and as concern over the global economy fuelled worries about demand for crude.

West Texas Intermediate crude futures edged up 0.2% to $67.17 per barrel, while Brent crude futures dipped 0.2% to $77.12.