By Tommy Wilkes
LONDON (Reuters) - Stock markets weakened on Monday as concerns mounted about an escalating fallout from a U.S. crackdown on China's Huawei Technologies.
Investors already on edge about an escalating U.S.-China trade dispute were further rattled after Beijing accused Washington of harboring "extravagant expectations" for a trade deal, underlining the gulf between the two sides.
Asian shares had managed to reverse some of last week's losses on Monday after Washington said it would lift tariffs in North America, and as investors cheered apparent wins by Conservative incumbent parties in elections in Australia and India.
But the mood did not carry over to Europe, where weak corporate earnings added to the gloom.
The pan-European Euro STOXX 600 extended earlier losses and was down 1.06% by 1100 GMT - the index, down 3.5% in May, is on track for its first monthly loss in 2019.
The German DAX slid 1.38%, while France's CAC 40 weakened 1.39%.
U.S. President Donald Trump's government added Huawei to a trade blacklist last week, imposing restrictions that will make it difficult to do business with U.S. companies.
The repercussions quickly became evident as Google (NASDAQ:GOOGL) suspended some business with Huawei.
In Europe, chipmakers Infineon Technologies, AMS and STMicroelectronics dropped sharply, falling between 6% and 12% on growing fears of a disruption to the industry's global supply chain.
"Market volatility continues to stem from announcements and interpretations of what is going on in trade disputes between the U.S. and its trading partners, but principally China," said Jasper Lawler, head of research at London Capital Group.
"China are unlikely to take Google's suspension of business with Huawei lying down."
On the positive side, a U.S. decision on Friday to remove tariffs on Canadian steel and aluminum prompted Canada's foreign minister to vow the quick ratification of a new North American trade agreement.
The MSCI index of world shares, which tracks shares in 47 countries, slipped 0.14%, leaving it 3.9% below its 2019 highs. The sudden return of trade war jitters has sent the stock market's year-to-date rally into reverse.
U.S. S&P 500 e-mini futures dropped 0.51%.
Prominent investor Jim Rogers, who co-founded the Quantum Fund with George Soros, told the Reuters Global Markets Forum that he believed Washington and Beijing would soon announce a trade deal, although the current spat would not be the last time Trump tried to exploit the prospect of a trade war.
"These are negotiating tactics from Mr. Trump at the moment. What will happen is we will have some good news, the market will have a rally. It will probably be the last rally," he said.
AUSSIE JUMPS
Oil prices briefly rallied after Saudi Energy Minister Khalid al-Falih said that there was consensus among OPEC and allied oil producers to reduce inventories "gently".
Rising tensions in the Middle East have also supported oil prices in recent days. Trump on Sunday tweeted that a conflict with Tehran would be the "official end" of Iran.
Both U.S. crude and Brent crude jumped more than 1%, before giving up most of those gains as broader risk sentiment soured. [O/R]
U.S. West Texas Intermediate crude traded at $62.75 a barrel by 1030 GMT after earlier trading above $63. Brent crude was at $72.30 per barrel.
In currency markets, the Australian dollar jumped nearly 1% to $0.6890 after the center-right Liberal National Coalition pulled off a shock win in a federal election, beating the center-left Labor party.
The Indian rupee also rallied , gaining more than 1% to 69.36 rupees per dollar after exit polls pointed to a majority for Prime Minister Narendra Modi's Bharatiya Janata Party and allies.
China's offshore yuan rebounded after touching its weakest against the dollar since November on Friday. It last traded up 0.1% at 6.944 per dollar.
China's central bank is expected to use foreign exchange intervention and monetary policy tools to stop it weakening past the psychologically important 7 yuan-per-dollar level in the near term, sources told Reuters.
The dollar was little changed against the euro at $1.1155.
Sterling recovered 0.2% to $1.2741 after suffering its biggest weekly loss since 2017 after an apparent collapse in Brexit talks in London.
German government bond yields edged higher. That followed a fall toward new 2-1/2 year lows last week after investors nervous about trade and a global economic slowdown flocked to safe-haven debt.
The 10-year U.S. Treasury yield was little changed at 2.396%.
Austrian yields held firm after a scandal prompted Chancellor Sebastian Kurz to pull the plug on his coalition with the far right at the weekend, raising the chances of a snap election.