* Asian stock markets : tmsnrt.rs/2zpUAr4
* World stocks down 0.3%, along with S&P futures
* European shares almost 1 percent lower
* Brent licks wounds after suffering sharpest drop in 7 wks
* U.S. Treasury yields fall further, flatten curve
* Next major event is minutes of Fed’s last meeting (Updates throughout, adds charts)
By Sujata Rao
LONDON, Nov 20 (Reuters) - World stocks were knocked off 22-month highs on Wednesday as a flare-up in Sino-U.S. tensions and the creeping return of U.S. recession fears fuelled a bid for bonds and other “safe” assets such as gold.
Wall Street futures were marked lower and European equities tumbled 0.8%, edging further off recent four-year highs hit when it had appeared Washington and Beijing were about to agree the first phase of a trade deal.
The mood in markets soured after the U.S. Senate angered China by passing a bill requiring annual certification of Hong Kong’s autonomy and warning Beijing against suppressing protesters. China demanded the United States stop interfering in its internal affairs and said it would retaliate.
U.S. President Donald Trump also threatened to up tariffs on Chinese goods if a trade deal is not reached soon.
“Markets have taken a bit of a wobble due to the talk about Hong Kong, but they had rallied a lot in recent weeks on expectations of a (trade) deal,” said Salman Ahmed, chief investment strategist at Lombard Odier.
Ahmed said both sides needed a deal to be signed — Trump cannot afford a recession because of his re-election bid next year, while China’s economy is slowing markedly.
“I think we are looking at a short-term setback rather than a major issue that would derail the process. The bill still has to be signed into law by Trump so there’s a high probability he will use it as leverage against China.”
MSCI’s index of Asia-Pacific shares ex-Japan tumbled 0.7%, Japan’s Nikkei fell 0.8% and Shanghai blue chips lost 1%. MSCI’s global index slipped 0.3%, ending a three-day winning streak.
Wall Street futures were down 0.3%-0.4%
Analysts noted through that U.S. shares had closed just below record highs on Tuesday, and world stocks are 0.5% off all-time peaks hit last year.
“It was noticeable that fixed income markets rallied despite equity markets being stable, suggestive of a market that remains cautious about the growth outlook,” ANZ told clients.
U.S. 10-year Treasury yields, which have fallen in six out of the past seven sessions, slipped as much as 5 basis points to 1.73%, a 2-1/2 -week low.
German bonds fell for the third straight day to touch a 2-1/2 week low, shrugging off European Central Bank Chief Economist Philip Lane’s comment that the euro zone economy would not fall into a recession.
“We have this classical risk-off trade taking place again,” Rainer Guntermann, a rates strategist at Commerzbank, said.
Commodity and bond market moves imply fears of economic recession may be creeping back with Brent crude steadying after a 2.6% tumble, its biggest in seven weeks .
Japan’s October exports fanned these fears, falling at their quickest rate in three years while China cut lending rates to support growth which is near 30-year lows.
A marked flattening of the U.S. bond curve — the gap between two-year and 10-year yields is at its narrowest in more than two weeks — also hints at a return of recession fears.
The curve inverted earlier this year, returning to normal only after three U.S. interest rate cuts.
But Federal Reserve officials have hinted there will be no further easing for now, a message the U.S. central bank may reiterate later in the day when it releases minutes from its last meeting. Markets are now pricing in just a 0.8% chance of a December rate cut.
Dour forecasts from retailers Home Depot and Kohl’s also fuelled worries about U.S. consumer spending, which has so far been robust, in contrast to manufacturing.
“We’ve had a bit of topping out of the U.S. consumer in the past couple of months,” Lombard Odier’s Ahmed said.
On currencies, the dollar nudged lower versus the yen to 108.4 but firmed 0.2% versus a basket of currencies . Sterling slipped 0.3%, pressured by dollar strength and a better-than-expected performance by left-wing opposition leader Jeremy Corbyn in pre-election TV debates.
But sterling and UK domestic stocks remain supported by opinion polls showing a hefty lead for Prime Minister Boris Johnson’s ruling Conservatives, viewed by some as more market-friendly.
If the Conservatives win a majority on Dec. 12, expectations are parliament would approve the Brexit deal Johnson agreed with Brussels last month and Britain would exit the European Union on Jan. 31, ending three-and-a-half years of uncertainty.
Additional reporting by Wayne Cole in Sydney; Dhara Ranasinghe and Saikat Chatterjee in London; Editing by Catherine Evans