China's yuan. Picture: REUTERS/KIM KYNG-HOON
China's yuan. Picture: REUTERS/KIM KYNG-HOON

Tokyo — Asian shares recouped early losses and crept higher on Tuesday, as China made a fresh attempt to stabilise its stock markets.

But the gains looked fragile amid fear of a sharp escalation in the US-China trade war.

Major US indices fell sharply on Monday after a Bloomberg report that the US is preparing to announce tariffs on all remaining Chinese imports by early December if talks next month between presidents Donald Trump and Xi Jinping falter.

Trump had raised the possibility of such a move previously, but had not indicated a time frame.

MSCI’s broadest index of Asia-Pacific shares outside Japan swung in and out of negative territory in morning trade and was up 0.2% by midday.

The index has lost 12% this month and is on track for its biggest October decline since 2008, during the global financial crisis.

Mainland China’s benchmark Shanghai composite and blue-chip CSI 300 indices were also choppy, falling in early trade before rising 0.7% and 1% respectively by midday.

China’s securities regulator said it would encourage share buybacks and mergers and acquisitions by listed firms, and would enhance market liquidity, in the latest attempt to put a floor under the country’s skidding equity markets.

Japan’s Nikkei average also erased early losses and advanced 1.3%. Traders said investors were looking for bargains among beaten-down stocks.

“At this point, nobody can say the equity market is bottoming out. Global investor sentiment remains shaky,” said Yasuo Sakuma, chief investment officer at Libra Investments in Tokyo.

The CBOE global markets volatility index, known as Wall Street’s “fear gauge”, jumped to as much as 27.86 points, its highest since October 11 and the second highest since the volatility shock of early February.

“The probability of global stocks turning to a bear market is increasing,” said Masanari Takada, cross-assets strategist at Nomura Securities.

“While some investors who look at fundamentals buy stocks on dips, there are other players who keep selling automatically in response to heightened volatility. At times like this, buyers can easily be overwhelmed by negative headlines on tariffs, etc.”

Adding to the jitters, China’s yuan continued to weaken, drawing closer to a closely watched support level.

In onshore trade, the yuan slipped 0.1% to 6.9724 to the dollar, a more than 10-year low, stirring speculation over whether the central bank will tolerate a slide beyond the key level of 7/$.

Major state-owned Chinese banks were seen swapping yuan for dollars in forwards on Tuesday, but there was no immediate evidence of dollar selling in the spot market as the currency neared a key support level, three traders said.

The dollar index against a basket of six major peers inched higher and was just below the 10-week high it hit on Friday.

The index gained on a decline in the euro after news that German Chancellor Angela Merkel will not seek re-election as head of her CDU party.

Merkel said she would not seek re-election as party chairwoman, heralding the end of a 13-year era in which she has dominated European politics.

Oil prices were mixed after easing overnight as Russia signalled that output would remain high, and as concern over the global economy fuelled fear about demand for crude.

West Texas Intermediate crude futures edged up 0.2% to $67.17 a barrel, while Brent crude futures dipped 0.2% to $77.12. (