August 9, 2018 / 8:59 AM / in 2 months

GLOBAL MARKETS-Europe's stocks wilt; US sanctions slam Russia's rouble

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

* Rouble extends drop to 4 percent after new US sanctions

* Turkey’s lira hits record low as U.S. tensions mount

* Oil steadies after swoon

* NZ dollar dives as central bank stays loose

* Pound stuck at 1 year low on Brexit concerns

By Marc Jones

LONDON, Aug 9 (Reuters) - European stock markets struggled on Thursday with trade war worries, Russia’s rouble tumbled after the United States imposed fresh sanctions on the country and Turkey’s lira dropped to a new low.

A rally in Chinese stocks had helped offset the latest escalation in the Sino-U.S. trade war in Asia overnight, but too much was going on nearby for Europe to stay upright.

London’s FTSE , Frankfurt’s DAX and Paris’ CAC40 were down 0.6 percent, 0.1 percent and 0.4 percent respectively, while German government bonds rose in broad grab for safety.

But the main fireworks were in the currency markets. The Russian rouble sank after Washington said it would impose fresh sanctions because it had determined that Moscow had used a nerve agent against a former Russian agent and his daughter in Britain .

There were also reports of a new U.S. Senate bill that would impose widespread sanctions on Russia for meddling in U.S. elections.

The rouble slid to its lowest since late 2016, 66 roubles to the dollar. The Russian currency dropped 1 percent after falling 3 percent overnight.

“I’m surprised that the market, in retrospect, was quite complacent about this risk,” said North Asset Management portfolio manager Peter Kisler, though he was relieved the new sanctions hadn’t flagged a ban on Russian sovereign debt or banks.

Turkey’s lira, bond and stocks markets were also taking a pounding after meetings between officials in Washington looked to have made little progress in mending a row over Ankara’s jailing of an American pastor.

The lira touched a record low of 5.44 against the dollar, weakening some 2.5 percent from Wednesday’s close. There was widespread selling in the country’s bond markets and Istanbul stocks dropped 1 percent.

CHINA RALLY

Asia had been much brighter. Shanghai blue chips closed up 2.5 percent after talk of possible government support for home-grown technology companies, the latest in a series of growth-boosting measures rolled out by Beijing as the trade dispute worsens.

Hopes for more Chinese infrastructure spending underpinned industrial resources, including iron ore and copper.

The gains in Chinese stocks helped MSCI’s broadest index of Asia-Pacific shares outside Japan reverse early losses to gain 0.5 percent.

Japan’s Nikkei slipped 0.2 percent, in part because core machinery orders fell.

Shares in Mazda Motor Corp, Suzuki Motor Corp and Yamaha Motor Co also fell on news they conducted improper fuel economy and emissions tests on their vehicles.

Japan will try to avert steep tariffs on its car exports and fend off U.S. demands for a free-trade agreement at talks in Washington later.

Early on Thursday, China’s state broadcaster said the country must counteract U.S. tariffs and that Beijing had the confidence to protect its own interests as well as the means to do so.

China had already announced additional tariffs of 25 percent on $16 billion worth of U.S. imports from fuel to autos. The tariffs will apply to billions of dollars in U.S. gasoline, diesel and other oil products, though not crude.

The oil market took the news hard on Wednesday, suffering losses of more than 3 percent.

Prices steadied a little on Thursday, with U.S. crude edging up 12 cents to $67.08 per barrel. Brent rose by 24 cents to $72.52.

KIWI WOES

Back in the FX markets, it wasn’t only emerging-market currencies that were struggling.

The pound skidded to its lowest against the dollar and euro in almost a year as fears grew Britain might leave the European Union without a deal on trade.

Traders reported a significant increase in investors hedging against a no-deal Brexit, an event that could send sterling into free fall and hurt the economy by raising trade barriers with Britain’s biggest export market.

Sterling was last trading at $1.2881, having dropped 0.4 percent overnight.

The Japanese yen seemed to be catching a bid as a safe haven, with the dollar easing to 111.07 yen after stretching as high as 111.44 on Wednesday.

The euro was relatively subdued at $1.1585, while the dollar index was up at 95.282.

The New Zealand dollar dropped 1.1 percent to a two-year low at $0.6665 after the country’s central bank pledged to keep rates at record lows well into 2020 .

“The risk of rate moves over the next 12 months is weighted more towards cuts than hikes, and financial markets will price the risk accordingly,” said Kiwibank’s chief economist, Jarrod Kerr.

“The good news here is interest rates and exchange rates will remain lower for much longer, assisting growth.” (Reporting by Marc Jones and Wayne Cole in Sydney, editing by Larry King)

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