Europe, Asia stocks set for worst monthly drop in three years on China, Fed

By Nigel Stephenson

LONDON (Reuters) - Stocks in Europe and Asia looked set on Monday for their worst monthly losses in at least three years, with investors still concerned about growth in China and the prospect of higher U.S. interest rates.

Falling share prices helped put pressure on the dollar, though weekend comments from U.S. Federal Reserve policymakers leaving the door open to a rise in interest rates as soon as next month kept it well above last week's seven-month lows.

Oil prices fell again both on the Fed rates outlook and as investors took profits on last week's 10 percent rise.

Just last week, after a sharp fall in Chinese shares sent global stocks tumbling, a rise in U.S. rates for the first time since 2009 next month had seemed off the table.

However, a senior Fed official said in a speech at the annual Jackson Hole symposium that U.S. inflation was likely to rebound, allowing rates to rise gradually.

"This is a market that is walking on glass; China seems to be the central theme feeding into a lot of these things, but today the focus is very much on U.S. interest rates again," said, James McGlew, executive director of corporate stock broking at Argonaut in Australia.

The pan-European FTSEurofirst 300 stocks index (FTEU3) fell 0.5 percent and was on track for its worst monthly performance since August 2011. Germany's DAX (GDAXI) was down 1.4 percent. Markets in Britain were closed for a holiday.

Asian shares closed lower. MSCI's main index of Asia-Pacific shares excluding Japan (MIAPJ0000PUS) was down 0.5 percent and headed for its biggest monthly losses in three years. Tokyo's Nikkei 225 index closed 1.3 percent lower, hit by weak Japanese industrial output data.

Chinese shares had another volatile session. The CSI300 index (CSI300) ended up 0.7 percent, after falling 4 percent at one point. The index was still down 11.8 percent for August. The Shanghai Composite (SSEC) lost 0.8 percent on the day and 12.5 percent for the month

The dollar lost ground against both the euro and the yen as investors trimmed bets against low-yielding currencies used to invest in higher-yielding ones in so-called carry trades.

"Stocks markets are in focus and absence of risk appetite is acting as a headwind to the dollar," said Niels Christensen, FX strategist at Nordea. "Having said that, with a September rate hike back in focus, I am biased towards more downside in the euro against the dollar."

The dollar index, which measures the greenback against a basket of currencies was last down 0.1 percent (DXY). The euro was up 0.3 percent at $1.1211 and the yen up 0.4 percent at 121.26 to the dollar.

The uncertainty about when the Fed might raise rates kept yields on German government bonds, the euro zone benchmark, close to last week's highs. Ten-year yields were last flat on the day at 0.72 percent.

Brent crude fell as investors took profits after oil saw its biggest two-day rally for six years last week. Brent was last down $1.30 a barrel at $48.75 and, despite last week's gains, heading for its fourth consecutive monthly decline.

Gold struggled over the Fed outlook, last trading around $1,131.80 an ounce in quiet trade with London on holiday.

"We think gold will likely come under further pressure as we near the Fed decision, as investors coalesce around the notion that the central bank will indeed move" and lift interest rates, said INTL FCStone analyst Edward Meir.