GLOBAL MARKETS-Euro bank review, Chinese tensions halt shares rally
* European shares down 0.8 pct, Wall Street seen opening down 0.5 pct
* Spike in China's short-term rates underscores tightening fears
* Nikkei tumbles 2 percent, reversing rise as yen jumps against dollar
* Fed tapering expectations pushed to next year after payrolls disappoint
* U.S. 10-year Treasury yield wallows at lowest levels since July
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 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."
CHINESE WHISPERS 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. 1/8ID:nL3N0ID0XN 3/4 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 tussle. 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.
U.S. IMPACT 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.