European stock markets retreat as Trump's trade war threat escalates

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Indices had already slumped on Monday, with Shanghai suffering its heaviest loss in three years, after Trump threatened to hike tariffs on US$200 billion of Chinese goods this week amid apparent setbacks in trade talks between the economic superpowers.

Some quickly dismissed the move as Trump-style brinkmanship, but many market players decided they would rather not take any chances.

"Smoke continues to linger across market sentiment following the smoke grenade President Trump launched over the weekend with the threat of adding further tariffs on Chinese imports at the end of the week," said Lukman Otunuga, a research analyst at FXTM.

Trump's remarks completely wrongfooted markets, coming just days after officials on both sides had sounded positive on the talks.

"Say what you want about the US president ... but predictability and subtlety were never part of his election pledges," OANDA senior market analyst Jeffrey Halley said.

'TARIFF MAN'S TRADE KERFUFFLE'

Stephen Innes at SPI Trading called the turmoil "the latest Tariff Man-triggered trade kerfuffle", warning that the downside to financial markets of a trade war could be huge.

"If you thought the recent tumult was vicious, trust me 'you ain't seen nothing yet' if indeed trade tensions escalate further," he said.

Equities could be facing a correction of 5-10 per cent, Innes warned.

Wall Street's Dow index, which started the day with a loss of 200 points, was off by more than 400 points by the end of the New York morning.

European stocks were down by more than 1.5 per cent at the close - with a growth outlook downgrade for the eurozone not helping matters.

Earlier, Shanghai's index recovered slightly, having lost a whopping 5.6 per cent the previous session, but Tokyo slumped further.

The International Monetary Fund warned that tensions between the economic superpowers were a "threat" to the world economy.

On currency markets, the yuan stabilised after being hammered on Monday, though most other higher-yielding, riskier units managed to claw back some of their losses.

But not the Turkish lira, which slipped back into crisis mode with a heavy fall before rebounding somewhat.

The lira "has come back onto investors' radars ... triggered by election shenanigans in the country", said Fiona Cincotta, senior market analyst at City Index traders.

Turkish President Recep Tayyip Erdogan on Tuesday welcomed an order to re-run the recent Istanbul election, a move the opposition has branded an attack on democracy.

His ruling Justice and Development Party (AKP) lost the mayorship of Turkey's biggest city by a narrow margin and refused to accept defeat.

Key figures around 1540 GMT:

London - FTSE 100: DOWN 1.6 per cent at 7,260.47 points (close)

Frankfurt - DAX 30: DOWN 1.6 per cent at 12,092.74 (close)

Paris - CAC 40: DOWN 1.6 per cent at 5,395.75 (close)

EURO STOXX 50: DOWN 1.8 per cent at 3,400.80

Tokyo - Nikkei 225: DOWN 1.5 per cent at 21,923.72 (close)

Hong Kong - Hang Seng: UP 0.5 per cent at 29,363.02 (close)

Shanghai - Composite: UP 0.7 per cent at 2,926.39 (close)

Euro/dollar: DOWN at US$1.1184 from US$1.1199 at 2050 GMT

Pound/dollar: DOWN at US$1.3047 from US$1.3097

Dollar/yen: DOWN at 110.38 yen from 110.87 yen

Oil - Brent Crude: DOWN US$1.19 at US$70.05 per barrel

Oil - West Texas Intermediate: DOWN US$1.05 at US$61.20 per barrel