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European shares fall, dollar firms on China slide

European and Asian stocks fell while government bonds and the dollar firmed on the back of a slump for Chinese shares and investors' concerns over the sustainability of the global economic recovery.

The Shanghai composite index slid 4% to a two-month closing low on disappointment that authorities were not taking steps to support the market amid increasingly heavy losses, rattling global markets.

The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, rose 0.3% to 79.176.

The yen also rose broadly. It gained some 0.5% against the dollar to ¥94.23 and 0.7% against the euro to ¥132.88.

“Chinese stocks were dumped into the close, and that provided an instant bid to the dollar, with everything coming off on the back of that,” said Christian Lawrence, currency strategist at RBC Capital Markets.

The pan-European FTSEurofirst 300 index fell 1% while US stock futures SPc1 were also down almost 1%.

Oil and metal prices and cyclical currencies like the Australian dollar also fell as the sell-off in China gathered pace.

The sharp reversal in China has badly shaken confidence, even though some form of correction had been widely expected after a rally in share prices stretching back to early March.

“It goes back to disappointing consumer sentiment figures in the US last week,” said Heino Ruland, strategist at Ruland Research, in Frankfurt.

“There is no sign that we can expect a V-shaped global recovery and the realization of this will take the heat out of the market. Earnings forecasts are still too high.”

Bank of Communications, China's fifth-largest lender, will kick off first-half results for its financial sector on Wednesday, followed by two of the world's biggest banks by market value later in the week: Industrial and Commercial Bank of China and China Construction Bank.

US Treasury and euro zone government debt prices rose, pushing their yields lower. The benchmark 10-year US T-note yield was down seven basis points at 3.444% while the 10-year Bund yield was about four basis points lower on the day at 3.262%.

UK gilts got an extra lift but sterling fell broadly after minutes from the Bank of England's August meeting showed the Monetary Policy Committee was split on whether to up the amount of gilt purchases it makes by even more than it did.

Six MPC members were in favor of the Ł50 billion ($82.33 billion) increase to Ł175 billion, but three, including BoE Governor Mervyn King, wanted to bolster the program by Ł75 billion. (Reuters)