China falls drag stocks back into red

By Patrick Graham

LONDON (Reuters) - Concerns over China kept financial markets on edge on Tuesday, with an underwhelming reaction to recent data and Beijing's efforts at corporate reform helping push European and Asian stocks lower.

Europe's main markets had inched higher in early trade, with investors avoiding firmer bets ahead of the first meeting of the U.S. Federal Reserve in years at which a possible rise in interest rates has been a live issue.

But worries about the impact of any Fed hike on dollar borrowers across the developing world, and its effect on growth, continued to dominate, with Shanghai stocks falling another 3.5 percent (SSEC) and oil at just $46 a barrel.

"It's all about caution today," said Andy Sullivan, a portfolio manager with Swiss investment firm GL Financial Group. "There is concern about the Fed, plus the China data continuing to be weak."

While Tokyo inched higher, MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) erased early gains to fall 0.7 percent. An hour after opening, the main indices in Frankfurt, London and Paris were up to 1 percent lower.

If concerns around emerging economies have dominated the past month, there are still reasons to be more bullish on a number of developed markets.

Sullivan said he was positive on European equities, which will draw support from the European Central Bank's campaign of quantitative easing over the next year and look undervalued compared to their U.S. peers.

In Britain, inflation data gave another signal of an economy inching back to health, supporting expectations the Bank of England will follow the Federal Reserve in raising interest rates next year. Sterling rose around a quarter of a percent. (EURGBP=)

The Australian dollar, often a proxy for China on major currency markets, was a touch lower, while iron ore and copper prices -- also often guided by Chinese demand -- fell by 0.5-1.0 percent.

A Barclays (LONDON:BARC) survey showed growth in China and other emerging markets was now the top concern for almost half of investors worldwide over the next year. Less than 10 percent saw Chinese assets as cheap, suggesting the sell-off has further to go.

"Investors believe overcapacity is China's main economic problem and most see meaningful structural reforms as necessary before they could feel more confident about prospects," Barclays analysts said in a report.

The yen , traditionally investors' safe haven of choice in times of turbulence, rose 0.6 percent, building on gains after the Bank of Japan held policy steady at the end of its two-day meeting.

The euro gave up about 0.7 percent to 135.05 yen (EURJPY=), while it was marginally lower against the dollar at $1.1304 .