Asian stocks dropped on Thursday as the latest escalation in the Sino-US trade war hit Chinese shares, while global bond markets were rattled by increased borrowing by Washington and Japan's new tolerance for higher yields.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.8 per cent, dragged down by a 1.2 per cent fall in Chinese H-shares. Japan's Nikkei declined 0.4 per cent. The CSI 300 index of China's A-shares dropped 1.4 per cent to three-week lows, extending falls from a July 24 high to 5.5 per cent.

The US administration on Wednesday increased pressure on China for trade concessions by proposing a higher 25 per cent tariff on $200 billion worth of Chinese imports. “If it had not been for the sideswipe on trade, markets would have been in much better shape this week. Apple's earnings were super, helping to quell concerns about high-tech companies,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities. “The BOJ's policy tweaks weren't much of a tightening, and did little damage,” he added.

MSCI's gauge of stocks across the globe is down 0.45 per cent so far this week, reversing gains from the previous four weeks, with Chinese shares accounting for the bulk of that. On Wall Street, the S&P 500 lost 0.10 per cent on Wednesday, but the Nasdaq Composite added 0.46 percent to extend its recovery from Monday's three-week low.

While industrial stocks fell 1.3 per cent on trade worries, technology shares were boosted by strong earnings from Apple. The world's largest company by market capitalisation rose 5.9 per cent, boosting its value to close to $1 trillion.

The Federal Reserve kept interest rates unchanged on Wednesday, as expected, characterising the US economy as strong and staying on track to increase borrowing costs in September and likely again in December. While that surprised nobody, US bond yields rose, with the benchmark 10-year yields breaking above 3 per cent to 2-1/2-month highs, after the US Treasury said it would boost borrowing in the bond market in the coming quarter.

Loosening grip

Global bond markets were also rattled by sharp rises in Japanese bond yields since the Bank of Japan loosened its grip on long-term yields on Tuesday. The 10-year Japanese government bond yield rose to a 1-1/2-year high of 0.145 per cent on Thursday.

Worries that higher yields in Japan may prompt Japanese investors to repatriate funds hit European bonds, boosting German and French yields to seven-week highs on Wednesday.

In the foreign exchange market, major currencies were little moved. The euro changed hands at $1.1661, while the yen stood at 111.67 yen to the dollar. The British pound was steady at $1.3119 ahead of an expected rate hike by the Bank of England later in the day.

Oil prices climbed a tad after two days of heavy losses on a surprise increase in US crude stockpiles. Brent crude futures rose 0.5 per cent to $72.78 per barrel after a 2.5 per cent fall the previous day. US West Texas Intermediate (WTI) crude futures edged up 0.4 per cent to $67.96 a barrel after Wednesday's 1.6 per cent fall.

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