* European shares down 0.8 pct, Wall Street seen opening
down 0.5 pct
* Spike in China's short-term rates underscores tightening
* Nikkei tumbles 2 percent, reversing rise as yen jumps
* Fed tapering expectations pushed to next year after
* U.S. 10-year Treasury yield wallows at lowest levels since
By Marc Jones
LONDON, Oct 23 (Reuters) - Concerns over tighter Chinese
monetary policy and worries a new check-up of euro zone banks
could prove costly for its weaker members halted a rally spurred
by hopes of extended U.S. stimulus.
European stocks were facing their sharpest falls in two
weeks on Wednesday as the details of a new, year-long test of
euro zone lenders by the bloc's central bank amplified anxiety
about China and the recent rapid run-up in world equity markets.
The pan-European FTSEurofirst 300 had extended
losses to 0.8 percent ahead of the Wall Street restart with
Italian, Spanish and Portuguese markets and banking stocks
leading the way with respective falls of 1.8, 2.0, 1.3
and 2.0 percent.
The ECB wants to unearth any risks hidden in the banking
system before supervision comes under its roof as part of a
three-pronged "banking union" plan designed to avoid a repeat of
the euro zone debt crisis.
Jan von Gerich, chief developed market strategist for
Nordea, said that if done properly the review should help the
euro zone, but in the short term it could revive questions about
its weaker members if public money is needed for bank repairs.
"The most interesting part will be what it says about Italy.
Its banks haven't gone through the same kind of scrutiny as the
ones in Spain or those in Greece, Ireland or Portugal - the
smaller countries, too, whether Slovenia will need a bailout for
example," he added.
The euro was 0.2 percent weaker at $1.3750 by 1130 GMT and
Asian markets had seen widespread weakness overnight on factors
ranging from a strengthening yen in Japan and fading rate cut
hopes in Australia.
Stock futures also pointed to falls of 0.5 percent for the
S&P 500 and Dow Jones Industrial when trading
resumes though it comes after the S&P hit yet another all-time
high on Tuesday.
"What has happened this morning is that we have the Chinese
rate surge on the policy tightening fears," said Alvin Tan, a
strategist at Societe Generale in London. "That has basically
generated a broad correction in risk assets."
In Europe, earning misses from some of the region's biggest
corporate names including chip maker STMicroelectronics
and brewer Heineken added to the pressure on shares.
Short-term Chinese money rates underscored
investors' concerns that regulators there are poised to tighten
liquidity to quell growing inflationary pressures.
The benchmark seven-day repo contract, which had
been steadily sliding since Oct. 9, spiked in the morning
session, a day after a policy adviser to the People's Bank of
China (PBOC) told Reuters it was weighing tightening measures.
The currency market focus remained on the prospect of
Federal Reserve keeping its stimulus programme running at full
pace after soft jobs data on Tuesday stoked concerns the U.S.
economy was losing momentum even before this month's budget
Nine of 15 U.S. primary dealers surveyed by Reuters on
Tuesday now expect the Fed to begin tapering its $85
billion-a-month bond-buying programme in March.
The dollar had stabilised down almost 1 percent against its
Japanese counterpart at 97.33 yen by 1130 GMT and was
hovering at $1.3760 to the euro after hitting a two-year
low in the previous session.
In the near term, the dollar could see further weakness
against other major currencies such as the euro and sterling,
said Sim Moh Siong, FX strategist for Bank of Singapore, adding
that the euro may rise towards levels around $1.39.
"There's certainly a high possibility that dollar weakness
might extend a bit further, but I'm not really sure that it
changes the medium-term dollar picture," Sim said.
The Australian dollar was last down 0.9 percent against the
dollar in a whipsaw session where it had jumped about a quarter
of a U.S. cent after a stronger-than-expected inflation reading
dampened rate cut expectations.
The yield on benchmark 10-year Treasury notes
fell to 2.462 percent, its lowest since late July, after closing
U.S. trade at 2.512 percent. German Bunds tracked the move as
they hit three-week highs.
On the commodities front, concerns about a near-term U.S.
crude surplus helped push U.S. crude prices down more
than 1.3 percent to $96.95 a barrel. Brent crude gave up
0.3 percent to $109.61 a barrel, supported by a weaker dollar.
Copper slipped from near one-month highs as traders
booked profits after the U.S. jobs report reinforced the metal's
weak fundamental outlook, falling 1.5 percent to $7,221.75.
Gold fell 0.4 percent to $1,331.80 an ounce, having
risen to a four-week high after the payrolls data.