China-US relations have taken a hefty knock from tit-for-tat tariffs

London (AFP) - European stock markets fell on Tuesday, erasing earlier gains as investor worries over Italy returned to the fore, dealers said.

“Fears over the fiscal stability in Italy and quite what the likely face-off with the EU will mean… remains a key concern for European markets,” said IG analyst Joshua Mahony.

On Wall Street, the Dow index came off to a weaker start, with analysts at Charles Schwab attributing the downturn to “the global markets continuing to focus on the recent rally in bond yields that has been a source of uneasiness”.

Meanwhile the Italian government tried to talk yields down, with Finance Minister Giovanni Tria saying that fears over his country’s financial health – and the consequent spike in borrowing costs for Rome – did not fairly reflect the situation in the eurozone’s third largest economy.

- Italian yields rise again -

“Recent levels of government bond yields do not reflect the fundamentals of the country, and once the economic policy agenda is approved by parliament, the uncertainty that has weighed on government securities in recent months will disappear,” Tria told parliament’s finance committee.

The closely watched spread between the rates on 10-year bonds paid by Italy compared with those offered by Germany, which is a measure of the added risk perceived by investors to holding onto Italian debt, had hit the highest level since April 2013 on Monday.

On Tuesday, the Italian benchmark 10-year bond yield rose another nearly four basis points to 3.60 percent, compared to Germany’s 0.55 percent.

In the eurozone, only Greek bonds yield more.

Brussels and Rome are at loggerheads after Italy’s populist government passed a purse-busting budget last week, to the annoyance of the EU.

“In a recurring theme of late, the main cause of the weakness is coming from Italy with bond yields rising once more,” said XTB analyst David Cheetham.

- Possible train wreck -

Elsewhere, the sell-off in Asian markets slowed on Tuesday, despite simmering US-China trade tensions.

A testy public interaction between Chinese Foreign Minister Wang Yi and US Secretary of State Mike Pompeo in Beijing on Monday refuelled market worries about China-US relations, which have taken a hefty knock from tit-for-tat tariffs.

“A possible train wreck on the negotiation front could completely derail global markets,” said Stephen Innes, head of Asia-Pacific trading at OANDA.

“We should not underestimate the potentially destabilising effect… a weaker yuan will have on regional markets, if not global markets.”

Adding to economic uncertainty on Tuesday was a bearish report from the International Monetary Fund, which lowered its forecast for Chinese economic growth in 2019 and warned that escalating trade tensions would drag on the world’s second-largest economy.

The IMF’s World Economic Outlook predicted China’s economy would grow 6.2 percent next year, down from a previous forecast of 6.4 percent.

Both of those figures would mark the slowest rate of expansion for China since 1990.

- Key figures around 1340 GMT -

London - FTSE 100: DOWN 0.4 percent at 7,204.01 points

Paris - CAC 40: DOWN 0.2 percent at 5,289.84

Frankfurt - DAX 30: DOWN 0.4 percent at 11,899.89

EURO STOXX 50: DOWN 0.2 percent at 3,305.38

New York - Dow Jones: DOWN 0.5 percent at 26,347.42

Hong Kong - Hang Seng: UP 0.2 percent at 26,258.30

Shanghai - Composite: UP 0.2 percent at 2,721.01 (close)

Tokyo - Nikkei 225: DOWN 1.3 percent at 23,469.39 (close)

Euro/dollar: DOWN at $1.1450 from $1.1492 at 2100 GMT

Pound/dollar: DOWN at $1.3058 from $1.3090

Dollar/yen: UP at 113.26 from 113.23 yen

Oil - Brent Crude: UP 62 cents at $84.53 per barrel

Oil - West Texas Intermediate: UP 37 cents at $74.66