GLOBAL MARKETS-Fears of prolonged trade war weigh on Asia stocks; bonds rally

* Asian stock markets: https://tmsnrt.rs/2zpUAr4
* MSCI Asia-Pacific index brushes new 4-month low
* Weak market sentiment supports dollar
* Risk aversion drives 10-yr German bond yield near record
low
* European stock futures modestly higher in early trade

By Shinichi Saoshiro
TOKYO, May 30 (Reuters) - Asian stocks tracked Wall Street
losses on Thursday as the latest exchanges between Beijing and
Washington signalled the heightened risk of a prolonged trade
war, stoking investors' concerns about the impact on global
economic growth.
European stock futures were higher in early trade, trimming
some losses after falling sharply the previous day. The
pan-region Euro Stoxx 50 futures STXEc1 were up 0.46%, German
DAX futures FDXc1 edge up 0.34% and FTSE futures FFIc1
gained 0.25%.
"We oppose a trade war but are not afraid of a trade war.
This kind of deliberately provoking trade disputes is naked
economic terrorism, economic chauvinism, economic bullying,"
Chinese Vice Foreign Minister Zhang Hanhui said, when asked
about the trade war with the United States. His comments followed reports from Chinese newspapers that
Beijing could use rare earths to strike back at Washington after
U.S. President Donald Trump remarked he was "not yet ready" to
make a deal with China over trade. As investors switched out of equities, safe-haven assets
such as government bonds found favour, with yields on German
benchmark debt approaching record lows.
The Shanghai Composite Index .SSEC fell 0.7% and Hong
Kong's Hang Seng .HSI lost 0.4%.
Japan's Nikkei .N225 was down 0.5% and Australian stocks
.AXJO shed 0.85%.
MSCI's broadest index of Asia-Pacific shares outside Japan
.MIAPJ0000PUS slipped to a fresh four-month low before finding
a bit of traction to edge up 0.1%.
"The equity markets are in the midst of pricing in a
long-term trade war, with participants shaping their portfolios
in anticipation of a protracted conflict," said Soichiro Monji,
senior strategist at Sumitomo Mitsui DS Asset Management.
"The upcoming G20 summit could provide the markets with
relief, as the United States and China could use the event to
begin negotiating again over trade."
The G20 meeting is set for June 28-29 in Japan.
Observers elsewhere expressed less optimism towards the G20
meeting.
"It seems to us that a Trump-Xi meeting on the sidelines of
the G20 meeting is more wishful thinking than hard political
reality," wrote Marc Chandler, chief market strategist at
Bannockburn Global Forex. "This is a moment that defines before
and after."
Amid the flight-to-safety, Germany's 10-year bond yield
DE10YT=RR fell to a three-year trough of minus 0.179%
overnight. A drop below minus 0.200% set in 2016 would take the
yield to a record low.
Spanish and Portuguese 10-year yields fell to record lows as
deeply negative German Bund yields have encouraged investors to
look elsewhere for returns. GVD/EUR
The 10-year U.S. Treasury yield US10YT=RR stood at 2.267%
after falling to a 20-month low of 2.210% on Wednesday.
Notwithstanding lower Treasury yields, the dollar index
against a basket of six major currencies .DXY was steady at
98.085 and in reach of a two-year peak of 98.371 set last week,
with the greenback serving as a safe haven.
The euro was a shade higher at $1.1137 EUR= , pulling back
slightly following three successive days of losses.
The dollar was little changed at 109.660 yen JPY= after
bouncing back from a two-week low of 109.150 brushed on
Wednesday.
Oil prices rose modestly after an industry report showed a
decline in U.S. crude inventories that exceeded analyst
expectations. O/R
The rise followed volatile trading on Wednesday, when oil
prices fell to near three-month lows at one point as trade war
fears gripped the commodity markets.
U.S. crude futures CLc1 were up 0.66% at $59.20 per barrel
after brushing $56.88 the previous day, their lowest since March
12.
Brent crude LCOc1 added 0.37% to $69.71 per barrel.
Trade worries have weighed on oil but supply constraints
linked to the Organization of the Petroleum Exporting Countries'
output cuts and political tensions in the Middle East have
offered some support.

(Editing by Simon Cameron-Moore and Sam Holmes)