TOKYO (REUTERS, AFP) - Asian shares sank on Monday (Aug 26) as the latest salvos in the United States-China trade war shook confidence in the world economy and sent investors steaming to the safe harbours of sovereign bonds and gold, while slugging emerging market currencies.

But equity markets later pared some losses, with E-Minis for the S&P 500 turning positive, after US President Donald Trump said China had contacted Washington overnight to say it wanted to return to the negotiating table.

Speaking on the sidelines of a summit of major industrialised nations in France, Trump hailed Chinese President Xi Jinping as a great leader and said he welcomed his desire for a trade deal and for calm.

Despite the positive lead for Wall Street, European stock markets still looked set to follow Asia's slide, with EUROSTOXX 50 futures down about 1 per cent, German DAX futures slipping 0.9 per cent and France's CAC 40 futures stumbling 0.7 per cent.

Yields on benchmark 10-year Treasury debt dropped to their lowest since mid-2016, while gold hit its highest since April 2013 as risk was shunned.

Last Friday, US President Donald Trump announced an additional duty on some US$550 billion (S$764 billion) of targeted Chinese goods, hours after China unveiled retaliatory tariffs on US$75 billion worth of US goods.

China's onshore yuan fell 0.6 per cent to new 11-year lows on Monday. But there was some relief that the central bank fixed the official midpoint at a relatively steady 7.0570 per dollar when it had been trading as weak as 7.1850 offshore, countering concerns Beijing would let the currency slide to keep exports competitive amid mounting US tariffs.

Tokyo's benchmark Nikkei index closed more than 2 per cent down on Monday as the yen surged against the US dollar on escalating US-China trade tensions. The Nikkei 225 fell 2.2 per cent, or 449.87 points, to close at 20,261.04, while the broader Topix index lost 1.6 per cent, or 24.22 points, to 1,478.03.

The US dollar, which dropped below 105 yen in early trade, changed hands at 105.24 yen against the dollar in Asian afternoon trade from 105.39 yen in New York on Friday.

Stocks in Hong Kong, where weekend clashes between the police and anti-government demonstrators grew increasingly violent, were the worst hit. The Hang Seng index, which plunged more than 3 per cent in the first few minutes of trading, was down 2.3 per cent at 3:14pm.

The Shanghai Composite was down 1.3 per cent. South Korea's Kospi index closed down 1.6 per cent, while Australia's S&P/ASX 200 ended down 1.3 per cent.

"Downside risks are increasing for both the global economy and markets," said Mr Mark Haefele, global chief investment officer at UBS. "As a result, we are reducing risk in our portfolios by moving to an underweight in equities to lower our exposure to political uncertainty."

"We continue to favour carry strategies in credit and foreign exchange markets, which benefit from central bank easing in a low-growth environment."

Mr Trump's new tariff measures were announced after US markets closed last Friday. But Wall Street had nose-dived earlier in the session after he said US companies should "immediately start looking for an alternative to China", in response to Beijing's latest retaliation.

At the Group of Seven meeting in France over the weekend, Mr Trump caused some confusion by indicating he may have had second thoughts on the tariffs.

But the White House said on Sunday that Mr Trump wished he had raised tariffs on Chinese goods even higher last week, even as he signalled he did not plan to follow through with a demand that US firms close operations in China.

Mr Trump is set to hold a joint news conference with French President Emmanuel Macron later on Monday.

The latest trade escalation overshadowed a pledge by Federal Reserve chair Jerome Powell to "act as appropriate" to keep the US economy healthy, although he stopped short of committing to rapid-fire rate cuts.

The markets clearly believe the Fed will have to act more aggressively and are fully priced for at least a quarter-point cut in September and more than 120 basis points of easing by the end of 2020.

"Trump shows no signs of moderating his destructive trade policies," said JPMorgan analyst Adam Crisafulli.

"Central banks can't fully ameliorate the downside of a global trade war," he added. "Companies will enter lockdown mode in terms of spending, and eventually hiring, until at least the November 2020 election amid all the uncertainty."

YIELDS RACE LOWER

Yields on 10-year Treasury notes were down at 1.46 per cent, having dived from a top of 1.66 per cent last Friday, leaving them just below two-year yields and inverting the curve.

"We continue to remain long 10's, targeting 1.3 per cent due to a combination of weakness in the global economy and trade war uncertainty filtering through into a weaker US economy," said Ms Priya Misra, head of global rates strategy at TD Securities.

"This will force the Fed to ease beyond a 'mid-cycle adjustment to policy'," she added. "We believe that the market is underpricing the risks of additional rate cuts in 2020."

The drop in yields swept the legs out from under the dollar, though it rallied steadily through the session thanks in part to heavy buying against emerging market currencies.

After an early hit on the yen to 104.47, it recovered most of the lost ground to stand at 105.33. The next major chart point is a low, around 104.10, briefly touched during the "flash-crash" of early January. Against a basket of currencies, it was a shade firmer at 97.673, having bounced from 97.477.

The euro was firm at US$1.1145, having climbed 0.6 per cent last Friday, although restrained somewhat by speculation the European Central Bank will also have to ease aggressively next month.

The dollar made inroads on most emerging market currencies, with the Turkish lira briefly tumbling as far as 6.4700 per dollar at one stage.

Spot gold got a boost from the slide in yields, rising 0.9 per cent to US$1,539.33 per ounce and touching its highest since April 2013.

Oil prices went the other way on worries the tariff dispute would crimp world demand.

Brent crude futures slid 68 cents, or 1.1 per cent, to US$58.66, while US crude lost 79 cents to US$53.38 a barrel.