Asian shares struggle as trade worries offset gains from Wall St. earnings

TOKYO (Reuters) – Asian shares on Thursday struggled to hold gains made after upbeat Wall Street earnings, as a trade war jitters rattled China's stock and currency markets, with the yuan hitting fresh one-year lows.

The dollar was a three-week high as investors cashed in on gains the currency made after US Federal Reserve Chairman Jerome Powell's two-day comment US economic strength.

European shares are expected to increase, with a flat-to-open spread in Britain's FTSE .FTSE and a lower start of 0.1 to 0.2 percent in France's CAC .FCHI and Germany's DAX .GDAXI.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS last up less than 0.1 percent, giving up much of its earlier gains of 0.56 percent. Japan's Nikkei .N225 lost 0.13 percent.

"At the moment, the markets seem to think that the US economy is strong enough to weather the impact of trade frictions. The Chinese growth looks more vulnerable, "said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

The Shanghai Composite Index .SSEC declined 0.6 percent, giving rise to a half of its recovery from a 1-1 / 2-year low set earlier this month. The technology-heavy Shenzhen Composite .SZSC shed 1.0 percent.

On Wall Street, the Dow Jones Industrial Average rose .DJI 0.32 percent and the S & P 500 .SPX gained 0.22 percent to hit the high five, while the Nasdaq Composite .IXIC declined marginally by 0.01 percent.

S & P 500 earnings are now expected to have increased 21.4 percent in the second quarter, up from an estimate of 20.7 percent on July 1. Of the 48 companies in the index, 87.5 percent posted earnings above.

"While strong U.S. corporate earnings certainly helped boost sentiment … that's not enough to push the stocks meaningfully," said Yasuo Sakuma, chief investment officer at Libra Investments.

Wall Street was also supported by Powell's reiterating that the US economy was healthy, even though it was likely to increase global protectionism over time.

The Fed's Beige book released on Wednesday also highlighted potential risks in the central bank's 12 districts concerned about the impact of tariffs, even the U.S. economy continues to expand at a moderate to modest pace.

"Trade war fears are something that will not go away overnight. Investors need to be prepared for various possibilities, such as the United States versus China and the United States versus European Union, "said Libra's Sakuma.

Still, given an absence of parking assets in U.S. assets, which has supported the dollar.

U.S. Benchmark 10-year notes US10YT = RR fell in price to yield 2.875 percent, from 2.862 percent on Tuesday. The U.S. yield curve US2US10 = TWEB remained near its flattest in nearly 11 years.

The dollar's index against a basket of six major currencies .DXY, having hit a three-week high of 95.41 on Wednesday.

Against the yen, the dollar hit a 6-1 / 2 month high of 113.140 yen on Wednesday and finally stood at 112.80 yen.

The euro fetched $ 1.1644 =, having hit a two-week low of $ 1.1602 the previous day.

Worries about the trade between the United States and China pummeled the yuan, which hit one-year low of 6.7800 per dollar CNH = D3 and 6.7427 CNY = CFXS in offshore and onshore trade.

"Market players are looking at both the onshore and offshore markets," said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.

"If the difference between the two markets becomes too big, that could mean the PBOC is intervening in the market."

She noted that the spread between offshore and onshore yuan had widened recently, it was still far from the levels it hit during the Chinese financial market shock in 2015 when the central bank was seen intervening heavily.

As the dollar broadly gains, XAU spot = dropped 0.4 percent in Asian trade, after falling to a one-year intra-day low of $ 1221.50 per ounce on Wednesday.

Oil prices maintained after U.S. government data quoted bullish demand for gasoline and distillates, which overshadowed a surprise build in U.S. crude inventories and U.S. crude oil production 11 million barrels per day for the first time.

U.S. Crude LCOcv1 was last 0.3% at $ 68.69 per barrel, down 0.1 percent in Asia after Wednesday's 1.0 percent rise, while Brent LCOcv1 was down 0.3 percent at $ 72.70.