GLOBAL MARKETS-Asian shares fall to 3-1/2 month low as trade war escalates

* MSCI Asia ex-Japan -0.9%, hits lowest since Jan 30
* Nikkei -0.8%, touches more than 3-month low
* China shares down at midday in volatile trade
* U.S. stock futures higher, yen lower following Trump
comments
* Asian stock markets: https://tmsnrt.rs/2zpUAr4

By Andrew Galbraith
SHANGHAI, May 14 (Reuters) - Fresh U.S.-China tariff war
volleys pressured Asian shares on Tuesday, but comments from
U.S. President Donald Trump that he expects trade negotiations
to be successful aided sentiment.
Chinese markets that were pummelled in early trade trimmed
losses amid signs of state support.
China on Monday announced it would impose higher tariffs on
$60 billion of U.S. goods following Washington's decision last
week to hike its own levies on $200 billion in Chinese imports.
MSCI's broadest index of Asia-Pacific shares outside Japan
.MIAPJ0000PUS was down 0.9% as volatile Chinese markets paused
for their midday break. The index had earlier fallen as much as
1.25% to its lowest since Jan. 30.
Providing some support for Asian markets were comments from
Trump late on Monday that trade talks with China are "going to
be very successful". That helped lift U.S. stock futures more
than 0.5%, though sentiment remained fragile. Prakash Sakpal, Asia economist at ING in Singapore, said
Monday's volatility showed how a "180-degree" turn in U.S.
rhetoric on trade negotiations had spooked markets.
"We don't see any quick end to this state of the markets
until we see some resolution, constructive dialogue and
something very solid in terms of deals. But the hopes for that
are a bit misplaced currently," he said.
Broader Asian markets were dragged lower by sagging Chinese
shares, with the MSCI China index .MICN00000PUS dropping 1.6%.
China's blue-chip CSI300 index .CSI300 swung between losses
and gains amid signs of possible state support, before finishing
the morning session down 0.2%. "Politicians may be willing to focus less on the market
impact until things get more severe, making it doubtful there
will be an early resolution to the current breakdown in
negotiations simply based on market moves," said Kerry Craig,
global market strategist at J.P. Morgan Asset Management.
"Furthermore, as there isn't a clear schedule for meetings
between Chinese and U.S. negotiators, markets are likely to be
more volatile."
Australian shares .AXJO lost 0.9% while Japan's Nikkei
stock index .N225 slid 0.8%, touching its lowest since
mid-February.
The U.S. Trade Representative's office on Monday said it
planned to hold a public hearing next month on the possibility
of imposing duties of up to 25% on a further $300 billion worth
of imports from China.
The tariff escalation has rattled global markets, even as
Trump said he would meet with Chinese President Xi Jinping next
month.
On Monday, the Dow Jones Industrial Average .DJI fell
2.38% to 25,324.99, the S&P 500 .SPX lost 2.41% to 2,811.87
and the Nasdaq Composite .IXIC dropped 3.41% to 7,647.02.
As investors flocked to safe-haven assets, U.S. Treasury
yields remained near six-week lows early on Tuesday, though they
moved higher following Trump's comments. Benchmark 10-year
Treasury notes US10YT=RR last yielded 2.4157% compared with a
U.S. close of 2.405% on Monday.
The two-year yield US2YT=RR , which rises with traders'
expectations of higher Fed fund rates, ticked up to 2.1945% from
a U.S. close of 2.193%. But data from CME Group continued to
show a more than 70% chance of the Fed cutting rates by the end
of 2019.
After an earlier inversion, U.S. 10-year yields moved higher
than those on three-month Treasury bills US3MT=RR . A sustained
inversion of this part of the yield curve has preceded every
U.S. recession in the past 50 years.
On Monday, some traders were concerned that China, the
largest foreign U.S. creditor, could dump Treasuries to counter
the Trump administration's hardening trade stance. But most
analysts downplayed such a possibility.
"If China did start to (sell Treasuries) it will galvanise
both sides of politics in the U.S. against China and the Fed
would be sent into the market to buy bonds," Greg McKenna,
strategist at McKenna Macro said in a note to clients.
"That would expand its balance sheet but it would allow it
to neutralise China's efforts to disturb U.S. financial markets.
So I doubt they'll try to sell Treasuries."
After earlier falling against the yen, the dollar
strengthened 0.25% against the Japanese currency to 109.57
JPY= .
The single currency EUR= was up about 0.1% on the day at
$1.1238, while the dollar index .DXY , which tracks the
greenback against a basket of six major rivals, was nearly
unchanged at 97.313.
China's offshore yuan CNH=D3 hit a fresh 2019 low early in
Asia on Tuesday before rebounding. It was last trading at 6.8933
per dollar, up 0.28% on the day.
Its onshore counterpart CNY=CFXS strengthened to 6.8733
per dollar after touching four-month lows on Monday, sparking
speculation China's central bank may be letting the currency
weaken amid the intensifying trade war.
Oil prices edged higher, buoyed by Middle East tensions
though gains were checked by trade war concerns. Saudi Arabia
said two of its oil tankers were among those attacked off the
coast of the United Arab Emirates, describing it as an attempt
to undermine security of supply amid United States-Iran
tensions. U.S. crude CLc1 was 0.33% higher at $61.24 per barrel
while Brent crude LCOc1 gained 0.36% to $70.48 per barrel.
Elsewhere, gold gave up gains after earlier rising amid
broader market jitters. Spot gold XAU= was flat at $1,299.35
per ounce. GOL/ Bitcoin BTC=BTSP gained 2.2% to $7,984.11.