Fra Zerohedge:

After yesterday’s bizarre, gamma-chasing rally, the week was set to close in a sea of red as world markets suffered a fresh bout of risk aversion on Friday after China doused hopes for a quick deal when its state media signaled a lack of interest in resuming trade talks with the U.S. under the current threat to escalate tariffs, while the government said stimulus will be stepped up to buttress the domestic economy. Meanwhile bets on a new pro-Brexit leader in Britain whipped the pound towards its worst week since October.

After an initial advance, Asian stocks erased most gains for the day with the MSCI index of Asia-Pacific shares outside Japan sliding to 15-week lows and down 2.6% for the week at the end of trading. An advance in Japanese stocks failed to offset falling Chinese shares. The Topix Index rose 1.1%, led by electric appliances, while China’s Shanghai Composite Index fell 2.5% after a front page commentary in the Communist Party’s People’s Daily evoked the patriotic spirit of past wars, saying the trade war would never bring China down.

“The China state media commentaries fueled concerns that the U.S.-China trade disputes will prolong, deterring risk-taking,” said Koji Fukaya, CEO of Japan’s FPG Securities. “This issue will probably be one of the major market drivers for a while as U.S.-China trade war influences global economic conditions.”

In terms of how the trade conflict plays out, “the next fortnight will be very, very important,” UniCredit strategist Kiran Kowshik said. “Chinese counter-tariffs are due on June 1 and if those get effective, I think markets will price in the risk of the U.S. imposing its additional $300 billion of tariffs ahead of the G20 meeting (near the end of June).”

Elsewhere, stocks retreated in South Korea and Hong Kong, while India’s S&P BSE Sensex Index extended a rebound into the second day and the main Australian index climbed to an 11-year peak as higher commodity prices boosted miners.

As Bloomberg notes, “traders are reassessing prospects for a trade deal after commentary on the blog Taoran Notes, which was carried by state-run Xinhua News Agency and the People’s Daily, the Communist Party’s mouthpiece, accused the U.S. of playing “tricks to disrupt the atmosphere.” Indications that the talks are paused will focus attention on the next opportunity for Presidents Xi Jinping and Donald Trump to meet — at the Group of Twenty meeting in Japan next month.”

As a result of the collapse in trade “optimism”, US equity futures including the S&P 500, Dow Jones and Nasdaq signaled a lower U.S. open after yesterday’s gains, while the Stoxx Europe 600 Index fell for the first time in four days, led by autos, with most sectors in red. Germany’s exporter-heavy DAX fell the most, auto stocks lost as much as 1.6%. Easyjet was a standout of the gauge after releasing earnings, while takeaway food delivery firms including Just Eat and Delivery Hero tumbled after Amazon confirmed an investment in rival Deliveroo.

Sentiment on Thursday was briefly, if erroneously soothed by better U.S. economic news, with housing starts surprisingly strong and a welcome pickup in the Philadelphia Federal Reserve’s manufacturing survey. Upbeat results from Walmart burnished the outlook for retail spending, though the chain also warned that tariffs would raise prices for U.S. consumers.

As the US earnings season winds down, of the 457 S&P 500 companies reporting about 75% have beaten profit expectations, according to Reuters data.

In rates, the sudden trade wind chilling helped Treasuries, with the 10-year yield down at 2.37% after a second strong week running for bond markets. German bonds pushed toward fresh highs with yields having dropped 14bps over the past two weeks as the U.S.-China trade conflict and uncertainty over Italy has spurred a strong risk-off bid. Yields on Spanish 10-year debt fell to a record as bonds across the euro region firmed.

In FX, the standout mover was the yuan, which was already trading at five-month lows, and smashed support after stops were triggered once the offshore Yuan tumbled below 6.92 yesterday, prompting Deutsche Bank to suggest “Stairway to Seven” is in the cards. The USDCNH hit a multi month high of 6.9491 even though Reuters reported again that the PBOC would not allow the currency to drop below 7.00.

Elsewhere in FX, the dollar lost a little of its shine against the safe-haven yen to stand at 109.64 from a top of 110.03. Against a basket of currencies, the dollar increased for a second day to head for its best week since February. The once again was depressed by fears about a Savlini government in Italy, holding at $1.1173, down 0.5% for the week so far.

Sterling, down for the 6th day in a row, was one of the worst performers as Britain’s Prime Minister Theresa May battled to keep her Brexit deal, and her premiership, intact amid growing fears of a disorderly departure from the European Union. The pound touched a three-month low of $1.2783 and was down 1.6% for the week so far. Also under pressure was the Australian dollar, losing 1.5% for the week to $0.6880 as investors piled into bets that interest rates would be cut in June.

Of note, after soaring 100% in two weeks, Bitcoin tumbled over 20% at one stage after what appeared to be a flash crash. It was last down 7%, albeit back on course for its third week of gains and having doubled in value this yea