By Karin Strohecker
LONDON (Reuters) - European stocks sank and major bond yields nudged lower on Tuesday as concerns over China-U.S. trade talks, disappointing European company news and escalating tensions between London and Brussels sparked a flight to safety.
The pan-European STOXX 600 index snapped a two-day winning streak to lose 1%. Germany's trade-sensitive DAX declined 1.1%, with data showing an unexpected rise in industrial output failing to lift the index.
A drop in sterling over a fresh Brexit flare-up cushioned Britain's FTSE, which slipped just 0.3%.
The losses followed mixed messages on trade tensions, with Washington blacklisting eight Chinese tech companies and President Donald Trump suggested a deal to end the trade dispute may not yet be quite in the offing.
On Monday, U.S. and Chinese deputy trade negotiators launched two days of talks aimed at paving the way for the first minister-level negotiations in months on Thursday and Friday.
"We have a lot of uncertainty still around – last night, Trump said there would only be a deal if he really got his way, the Chinese want to exclude all the disputed topics ... some are cautiously optimistic, other are rather skeptical," said Antje Praefcke at Commerzbank (DE:CBKG) in Frankfurt.
"We expect that we could see a mini deal with neither Beijing nor Washington interested in letting this escalate. But for a real deal, the positions are too far apart."
Mixed corporate news added to the downbeat picture, with LSE shares tumbling 5% after Hong Kong pulled out of its takeover bid for the exchange, while German biotech firm Qiagen plunged 20% to three-year lows after a sales warning.
MSCI's All-Country World Index, which tracks shares across 47 countries, slipped 0.1%.
Europe's losses followed healthy gains in Asia, where Japan's Nikkei climbed 1.0% as MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.55%, led by gains in tech shares in South Korea and Taiwan.
Hong Kong extended gains after the territory's leader said she had no plans to use emergency regulation ordinance to introduce other laws.
Chinese mainland stocks returned from a week-long holiday with a 0.6% rise. The National Holiday celebrations also offered a rare respite to China's retail sector, with spending on goods and dining returning to growth this year.
Yet a private survey showed growth in China's services sector at its slowest in seven months in September, offering little momentum to an economy that has been expanding at its weakest pace in almost three decades.
With the focus turning to trade talks, Trump also said he hoped Beijing found a humane and peaceful resolution to political protests in Hong Kong, and said that situation had the potential to hurt the discussions.
An increase in U.S. tariffs on $250 billion worth of Chinese goods, to 30% from 25%, is scheduled for Oct. 15. Trump has said it will take effect if no progress is made in the negotiations.
"People are hoping Trump may postpone some of the upcoming tariffs," said Yukino Yamada, senior strategist at Daiwa Securities. "Nevertheless, you can't ignore that fact that, up until now, the market has underestimated Trump's determination on tariffs."
U.S. futures pointed to a 0.6% drop on open for Wall Street. On Monday, the S&P 500 lost 0.45%, unable to cling on to gains made after positive tweets and headlines about the trade talks.
LOSING MOMENTUM
The flight to safety also added to pressure in fixed income markets with German bund yields nudging lower while U.S. Treasuries eased ahead of some $78 billion in note and bond supply slated for auction this week.
Meanwhile in currencies the dollar lost momentum, dipping 0.1% against a basket of rivals after posting its biggest single-day rise in a week in the previous session. The safe-haven yen rose, with the dollar trading at 106.89.
Markets will be keenly watching comments on Tuesday from U.S. Federal Reserve Chairman Jerome Powell after weak data raised concerns the U.S. economy may be heading towards a protracted slowdown.
The euro got a boost from the healthy German industrial output data, rising 0.2% to $1.0983 though not far off the more than a two-year low it hit last week.
Sterling tumbled to a one-month low against the euro after reports that Brexit talks between Britain and Brussels were close to breaking down.
Tempers flared as the EU accused Britain of playing a "stupid blame game" after a Downing Street source said a deal was essentially impossible because German Chancellor Angela Merkel had made unacceptable demands.
"Brexit is back with GBP underperforming other major currencies as the battle lines between the UK and EU have hardened further," Ned Rumpeltin, European head of FX Strategy wrote in a note to clients.
The pound fell 0.5% to a one-week low of $1.2226, and weakened more than 0.7% against the euro, touching a low of 89.93 pence - its weakest since Sept. 9. [GBP/]
In emerging currency markets the focus was on the lira, which was treading water after hitting a five-week low in early trade and a more than 2% tumble on Monday over concerns about a planned Turkish military incursion in northern Syria.
Trump threatened to destroy Turkey's economy if Ankara took those moves too far, after the U.S. leader opened that door by withdrawing U.S. troop from the area.
Worries over the health of the global economy sent oil prices 1.4% lower. Brent crude futures stood at $57.5483 a barrel while U.S. West Texas Intermediate (WTI) traded at $51.99. [O/R]