LONDON, Aug 9 (Reuters) – Alarm bells were ringing on Thursday as harsh new U.S. sanctions drove drove down Russia’s rouble Turkey’s lira plunged as worries mounted that Ankara was sliding towards a full-blown economic crisis. A rally in Chinese stocks had helped Asia offset the latest escalation in the Sino-U.S. trade war overnight after Beijing matched the latest U.S. sanctions, but too much was going on nearby for Europe to remain unscathed. London’s FTSE , Frankfurt’s DAX and Paris’ CAC40 were down 0.7 percent, 0.3 percent and 0.4 percent respectively, while German government bonds rose in broad grab for safety. Wall Street futures pointed to a steady start to New York trading but that was deceptive. 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, something the Kremlin denies. There were also reports of a new U.S. Senate bill that, if passed, would impose even more widespread punishments for meddling in U.S. elections. The rouble duly slid to its lowest since late 2016, 66.1 roubles to the dollar and left the Russian currency down almost 4 percent lighter than it had been 24 hours previously.. “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 for the time being. Turkey’s lira, bond and stocks markets were taking even more of 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 too. “We think Turkey may need to approach the IMF or seek other external support. Otherwise, capital-control measures seem to be a distinct possibility,” said fund manager Lombard Odier’s chief investment strategist Salman Ahmed.
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 reverse early losses to gain 0.5 percent, though 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.