* Asian stock markets : https://tmsnrt.rs/2zpUAr4
* World stocks down 0.3%, along with S&P futures
* European shares almost 1 percent lower
* Brent licks wounds after suffering sharpest drop in 7 wks
* U.S. Treasury yields fall further, flatten curve
* Next major event is minutes of Fed's last meeting
(Updates throughout, adds charts)
By Sujata Rao
LONDON, Nov 20 (Reuters) - World stocks were knocked off
22-month highs on Wednesday as a flare-up in Sino-U.S. tensions
and the creeping return of U.S. recession fears fuelled a bid
for bonds and other "safe" assets such as gold.
Wall Street futures were marked lower and European equities
tumbled 0.8%, edging further off recent four-year highs hit when
it had appeared Washington and Beijing were about to agree the
first phase of a trade deal.
The mood in markets soured after the U.S. Senate angered
China by passing a bill requiring annual certification of Hong
Kong's autonomy and warning Beijing against suppressing
protesters. China demanded the United States stop interfering in
its internal affairs and said it would retaliate.
U.S. President Donald Trump also threatened to up tariffs on
Chinese goods if a trade deal is not reached soon. "Markets have taken a bit of a wobble due to the talk about
Hong Kong, but they had rallied a lot in recent weeks on
expectations of a (trade) deal," said Salman Ahmed, chief
investment strategist at Lombard Odier.
Ahmed said both sides needed a deal to be signed -- Trump
cannot afford a recession because of his re-election bid next
year, while China's economy is slowing markedly.
"I think we are looking at a short-term setback rather than
a major issue that would derail the process. The bill still has
to be signed into law by Trump so there's a high probability he
will use it as leverage against China."
MSCI's index of Asia-Pacific shares ex-Japan .MIAPJ0000PUS
tumbled 0.7%, Japan's Nikkei .N225 fell 0.8% and Shanghai blue
chips .CSI300 lost 1%. MSCI's global index .MIWD00000PUS
slipped 0.3%, ending a three-day winning streak.
Wall Street futures were down 0.3%-0.4% ESc1 YMc1 NQc1
Analysts noted through that U.S. shares had closed just
below record highs on Tuesday, and world stocks are 0.5% off
all-time peaks hit last year.
"It was noticeable that fixed income markets rallied despite
equity markets being stable, suggestive of a market that remains
cautious about the growth outlook," ANZ told clients.
U.S. 10-year Treasury yields, which have fallen in six out
of the past seven sessions, slipped as much as 5 basis points to
1.73%, a 2-1/2 -week low US10YT=RR .
German bonds fell for the third straight day to touch a
2-1/2 week low DE10YT=RR , shrugging off European Central Bank
Chief Economist Philip Lane's comment that the euro zone economy
would not fall into a recession.
"We have this classical risk-off trade taking place again,"
Rainer Guntermann, a rates strategist at Commerzbank, said.
THE R WORD
Commodity and bond market moves imply fears of economic
recession may be creeping back with Brent crude steadying after
a 2.6% tumble, its biggest in seven weeks LCoc1
Japan's October exports fanned these fears, falling at their
quickest rate in three years while China cut lending rates to
support growth which is near 30-year lows. A marked flattening of the U.S. bond curve -- the gap
between two-year and 10-year yields is at its narrowest in more
than two weeks -- also hints at a return of recession fears.
The curve inverted earlier this year, returning to normal
only after three U.S. interest rate cuts.
But Federal Reserve officials have hinted there will be no
further easing for now, a message the U.S. central bank may
reiterate later in the day when it releases minutes from its
last meeting. Markets are now pricing in just a 0.8% chance of a
December rate cut FEDWATCH .
Dour forecasts from retailers Home Depot and Kohl's also
fuelled worries about U.S. consumer spending, which has so far
been robust, in contrast to manufacturing.
"We've had a bit of topping out of the U.S. consumer in the
past couple of months," Lombard Odier's Ahmed said.
On currencies, the dollar nudged lower versus the yen to
108.4 JPY= but firmed 0.2% versus a basket of currencies
.DXY . Sterling slipped 0.3%, pressured by dollar strength and
a better-than-expected performance by left-wing opposition
leader Jeremy Corbyn in pre-election TV debates. But sterling and UK domestic stocks .FTMC remain supported
by opinion polls showing a hefty lead for Prime Minister Boris
Johnson's ruling Conservatives, viewed by some as more
market-friendly. If the Conservatives win a majority on Dec. 12, expectations
are parliament would approve the Brexit deal Johnson agreed with
Brussels last month and Britain would exit the European Union on
Jan. 31, ending three-and-a-half years of uncertainty.
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US yield curve https://tmsnrt.rs/2Xwm60p
Odds on Conservative majority vs. UK assets https://tmsnrt.rs/343MPE1
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