Oil prices, stocks retreat as China weighs on sentiment

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Oil prices slumped more than three percent and stock markets retreated Tuesday as China's struggling economy weighed on sentiment.

A stream of indicators, including the latest on manufacturing, has highlighted weakness in the Chinese economy, the world's second largest after the United States.

China's "only plan for recovery seems to be in exporting its way out of economic doldrums", said John Evans, analyst at oil broker PVM.

"Yet external demand flounders in the face of a global economy that on the whole is sputtering at best."

Oil demand has been disappointing elsewhere as well.

"The fact that recent data shows no signs of any acceleration in import demand in China, Europe or North America points to a situation where the oil market is not going to be as tight as expected a few months ago," said market analyst Fawad Razaqzada at City Index and FOREX.com.

With oil producers reluctant to cut output -- and the OPEC oil cartel and its allies have even been considering boosting production -- oil prices have been on a downward trend.

Traders were awaiting US manufacturing figures Tuesday ahead of key American jobs data on Friday, hoping for a clearer picture on the pace of US interest-rate cuts set to begin this month.

"With a rate cut in September essentially a done deal, the speed of further cuts will depend on upcoming data," said Razaqzada.

He said the US manufacturing figures and jobs data would need to be quite weak to further weaken the dollar, which has already softened in anticipation of interest rate cuts.

Wall Street stocks slid after coming back from a three-day holiday weekend and solid gains on Friday that saw the Dow set a new closing record.

"The negative disposition stems in part from some natural consolidation activity, which is being stirred by reminders that the month of September is the worst month, on average, for the stock market," said Briefing.com analyst Patrick O'Hare.

In foreign exchange, the yen strengthened after Bank of Japan chief Kazuo Ueda restated his intention to lift interest rates again if inflation and the economy meet its forecasts.

The bank's surprise decision to hike in July, hours before the Federal Reserve indicated it was ready to begin cutting US borrowing costs, sparked a massive unwind of the so-called "yen carry trade" in which investors used the cheap currency to buy high yielding assets like stocks.

In company news on Tuesday, shares in Cathay Pacific slipped as the Hong Kong carrier said that 15 of its Airbus A350 jets needed new engine parts after inspecting its entire fleet, which was grounded following a "first of its type" engine component failure.

But shares in British engine manufacturer Rolls-Royce, whose Trent XWB-97 engines powered the planes, gained three percent after starting the week with a 6.5-percent drop as not all of Cathay's A350s were affected.

- Key figures around 1330 GMT -