By Shinichi Saoshiro
TOKYO (Reuters) - Asian stocks tracked Wall Street losses on Thursday as the latest exchanges between Beijing and Washington signaled the heightened risk of a prolonged trade war, stoking investors' concerns about the impact on global economic growth.
European stock futures were higher in early trade, trimming some losses after falling sharply the previous day. The pan-region Euro Stoxx 50 futures were up 0.46%, German DAX futures edge up 0.34% and FTSE futures gained 0.25%.
"We oppose a trade war but are not afraid of a trade war. This kind of deliberately provoking trade disputes is naked economic terrorism, economic chauvinism, economic bullying," Chinese Vice Foreign Minister Zhang Hanhui said, when asked about the trade war with the United States.
His comments followed reports from Chinese newspapers that Beijing could use rare earths to strike back at Washington after U.S. President Donald Trump remarked he was "not yet ready" to make a deal with China over trade.
As investors switched out of equities, safe-haven assets such as government bonds found favor, with yields on German benchmark debt approaching record lows.
The Shanghai Composite Index fell 0.7% and Hong Kong's Hang Seng lost 0.4%.
Japan's Nikkei was down 0.5% and Australian stocks shed 0.85%.
MSCI's broadest index of Asia-Pacific shares outside Japan slipped to a fresh four-month low before finding a bit of traction to edge up 0.1%.
"The equity markets are in the midst of pricing in a long-term trade war, with participants shaping their portfolios in anticipation of a protracted conflict," said Soichiro Monji, senior strategist at Sumitomo Mitsui DS Asset Management.
"The upcoming G20 summit could provide the markets with relief, as the United States and China could use the event to begin negotiating again over trade."
The G20 meeting is set for June 28-29 in Japan.
Observers elsewhere expressed less optimism toward the G20 meeting.
"It seems to us that a Trump-Xi meeting on the sidelines of the G20 meeting is more wishful thinking than hard political reality," wrote Marc Chandler, chief market strategist at Bannockburn Global Forex. "This is a moment that defines before and after."
Amid the flight-to-safety, Germany's 10-year bond yield fell to a three-year trough of minus 0.179% overnight. A drop below minus 0.200% set in 2016 would take the yield to a record low.
Spanish and Portuguese 10-year yields fell to record lows as deeply negative German Bund yields have encouraged investors to look elsewhere for returns. [GVD/EUR]
The 10-year U.S. Treasury yield stood at 2.267% after falling to a 20-month low of 2.210% on Wednesday.
Notwithstanding lower Treasury yields, the dollar index against a basket of six major currencies was steady at 98.085 and in reach of a two-year peak of 98.371 set last week, with the greenback serving as a safe haven.
The euro was a shade higher at $1.1137, pulling back slightly following three successive days of losses.
The dollar was little changed at 109.660 yen after bouncing back from a two-week low of 109.150 brushed on Wednesday.
Oil prices rose modestly after an industry report showed a decline in U.S. crude inventories that exceeded analyst expectations.
The rise followed volatile trading on Wednesday, when oil prices fell to near three-month lows at one point as trade war fears gripped the commodity markets.
U.S. crude futures were up 0.66% at $59.20 per barrel after brushing $56.88 the previous day, their lowest since March 12.
Brent crude added 0.37% to $69.71 per barrel.
Trade worries have weighed on oil but supply constraints linked to the Organization of the Petroleum Exporting Countries' output cuts and political tensions in the Middle East have offered some support.