Grexit, China growth fears weigh on European assets

LONDON (Reuters) - European stocks dipped and low-rated bond yields rose on Monday as dismal Chinese trade data, escalating violence in Ukraine and fears Greece is on a collision course with its European partners inflamed market tensions.

Wall Street was set to open around 0.5 percent lower while investors sought refuge in low-risk assets such as top-rated German bonds and the Japanese yen.

Greek Prime Minister Alexis Tsipras ruled out on Sunday extending the country's bailout and said he would reverse some of the reforms imposed by its lenders, jeopardizing the country's finances and its place in the euro zone.

His speech came after Standard & Poor's cut Greece's sovereign debt rating on Friday and Moody's put its rating on review for a downgrade.

"The immediate headline reaction was that this speech would make it much more difficult for Greece to come to an agreement with its European partners and thus the risk of Greece leaving the euro zone was now higher than ever," said Gary Jenkins, chief credit strategist at LNG Capital.

Jenkins said there was now a 50 percent chance of a 'Grexit'.

Athens' stock market slipped around 5.8 percent <.ATG>. With the European Central Bank set to pull the plug on its funding for Greek banks on Wednesday, the country's banking index was down over 10 percent <.FTATBNK>.

Greek 10-year bond yields shot up 84 basis points to 11.30 percent, while three-year yields surged above 21 percent.

Broader European shares tracked earlier losses in Asia.

The pan-European FTSEurofirst 300 index <.FTEU3> fell 1 percent, with Germany's DAX down 1.5 percent <.GDAXI>, France's CAC down 1.1 percent <.FCHI> and Britain's FTSE down 0.7 percent <.FTSE>.

Fallout from Greece for other low-rated bonds was relatively contained, with Portuguese, Italian and Spanish 10-year yields up between 4-9 basis points and top-rated German Bund yields dipping 5 bps to 0.33 pct.

RBS analysts said on Monday there is a 40 percent chance that 10-year German bond yields could turn negative this year, citing events in Greece and the European Central Bank's plan to buy 60 million euros a month of bonds from March.

"Turbulence from Greece helps Bunds to perform and accelerates the fall in yields towards zero," said Marco Brancolini, a rates strategist at RBS.

Traders said the spiraling situation in Ukraine -- where Russian-backed rebels have been pitted against the pro-European government in a bloody, year-long battle -- was also prompting investors buy to German bonds, driving down their yields.

European Union foreign ministers approved new sanctions on Russia on Monday, while Russian president Vladimir Putin warned he would not be spoken to in the language of ultimatums.

UGLY DATA

Data on Sunday showing China's trade performance slumped in January meanwhile highlighted deepening weakness in the world's second-largest economy. Chinese exports fell 3.3 percent from a year ago while imports tumbled 19.9 percent, far more than expected.

"The trade data is ugly, which points to a weaker economy ahead," Guoyuan Securities strategist Wang Mingli said.

Frayed investor nerves helped the yen gain around half a percent to trade at 118.55 yen per dollar and 0.3 percent to 134.20 yen per euro . Strong Japanese consumer sentiment data and comments from a Bank of Japan policymaker, who said the country would not slip back into deflation, also gave the currency a boost.

Oil prices steadied as falling U.S. oil rig counts and signs of healthy U.S. growth offset concerns over the strength of the Chinese economy. Brent oil futures rose 1.1 percent to $58.43 per barrel , heading back to a six-week high of $59.06 touched on Friday.

Gold rebounded slightly from a three-week low of $1,228.50 per ounce touched on Friday as share prices eased, trading at $1,243.20 .

(Additional reporting by Samuel Shen and Kazunori Takada in Shanghai; Editing by Catherine Evans)

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