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* European shares down 2.3 percent after Chinese stocks sink
* Oil up on Saudi/Iran tensions
* Chinese factory activity shrinks for 10th month
* Safety plays boost bond prices
By Marius Zaharia
LONDON, Jan 4 (Reuters) - European shares fell on Monday on
the first trading day of 2016 after weak Chinese data rekindled
global growth worries, while oil prices jumped and bond yields
dropped on rising tensions in the Middle East.
Chinese manufacturing surveys showed that any hopes for a
recovery in the sector were premature, with factory activity
contracting for a 10th straight month in December and at a
faster pace than in the previous month. ID:nS7N10C01Y
Adding to the worries, China's central bank fixed the yuan
at a 4-1/2 year low. Mainland Chinese shares .CSI300 fell 7
percent, prompting the stock exchange to halt trading.
European stocks followed Asia's lead. The pan-European
FTSEurofirst 300 index .FTEU3 fell 2.3 percent, while the euro
zone's blue-chip Euro STOXX 50 index .STOXX50E declined by 2.6
percent. Germany's DAX .GDAXI dropped 3.4 percent.
"(Equity) investors are not going to like the start of this
year, particularly when you have news that trading was halted in
China due to a market sell-off," said Naeem Aslam, chief market
analyst at AvaTrade.
Global oil benchmark Brent LCOc1 , which fell 35 percent
last year due to fears of over-supply in a global slowdown,
climbed more than a dollar to a high of $38.50 per barrel before
easing back to $37.47.
The rise came as relations between leading crude producers
Saudi Arabia and Iran deteriorated, raising concerns about
potential supply disruptions.
Saudi Arabia, the world's biggest oil exporter, cut
diplomatic ties with Iran on Sunday in response to the storming
of its embassy in Tehran. Bilateral tensions escalated following
Riyadh's execution of a prominent Shi'ite cleric on Saturday.
ID:nL8N14N01H
The Saudi riyal fell sharply against the dollar in the
forward foreign exchange market. One-year dollar/Saudi riyal
forwards SAR1Y= jumped to 680 points, near a 16-year high.
SAFE HAVENS
Those tensions prompted investors to seek the safety of
bonds, with yields on triple-A rated German 10-year Bunds
DE10YT=TWEB falling 6 basis points to 0.575 percent.
The cautious mood towards riskier assets helped the Japanese
yen, with the dollar falling below 119 yen for the first time
since mid-October JPY= .
Gold XAU= jumped nearly 1 percent to $1,069.20 per ounce.
"Concern over the health of the Chinese economy accompanied
by spiking tensions in the Middle East have combined to ensure
... firm demand for safe-haven assets," Rabobank strategists
said in a note.
The offshore yuan fell as low as 6.6185 to the dollar
CNH=D3 , its weakest since early 2011. Onshore, the yuan CNY=
hit its lowest since April 2011, at 6.5166.
The euro firmed 0.5 percent to $1.0915 EUR= .
Investors are wondering how much further the U.S. Federal
Reserve will raise rates this year after its first rate hike in
almost a decade last month.
An immediate focus will be on Monday's ISM survey on U.S.
manufacturing, which is expected to show the sector is still in
contraction after hitting a 6-1/2-year low in November.
USPMI=ECI
"It was quite unusual for the Fed to raise rates when the
ISM is below 50, (which indicates contraction). And we are
likely to see another month of contraction. We have to see how
long this will continue," said Masahiro Ichikawa, senior
strategist at Sumitomo Mitsui Asset Management.