Europe close: Early bounce for stocks fizzles out

A bounce for European stocks had fizzled out by the end of trading amid worries that the White House might ratchet up the pressure on Beijing even futher in response to weakness in the Chinese currency, the yuan, during the previous session.

Overnight, the US Treasury officially labeled China a currency manipulator, even after the People's Bank of China, the country's central bank, had moved to stem yuan weakness.

Late in the afternoon, US national economic council director, Larry Kudlow, reportedly said the US administration was not planning any additional response to the PBoC's decision the day before to allow the yuan to fall to its lowest level since 2008.

But the US Treasury's decision was still worrying some analysts.

According to Andrew Hunter at Capital Economics: "it illustrates how rapidly tensions are escalating and suggests that a resolution to the trade conflict is further away than ever."

Overnight, the People's Bank of China set its daily fix for the yuan at 6.9683 against the US dollar, which was stronger than the 6.9736 midpoint that Reuters had anticipated and saw the spot rate fall back below the psychological 7.0 level, allaying some concerns of a further imminent escalation in the trade war between the US and China.

Just hours before, the US Treasury had chosen to name the People's Republic of China a currency manipulator for the first time since 1994 following yuan weakness the day before that some analysts said was "fair" to interpret as a deliberate move by Beijing, although traders were watching the daily fixings for a possible confirmation.

As of the close of trading, the benchmark Stoxx 600 was down by 0.47% to 367.71, while the German Dax finished 0.78% lower at 11,567.96, and the French Cac-40 gave back 0.13% to end at 5,234.65.

In parallel, the US dollar was down by 0.44% to 7.0198 against the yuan and the euro was 0.28% lower at 7.8650.

Commenting on the PBoC's decision to allow the yuan to weaken below 7.0 against the US dollar and the US Treasury's response, analysts at HSBC said that escalating tensions were chipping away on what good will there was between Washington and Beijing and that the risk of the trade war lasting "well into" 2019 or escalating further was rising.

"It is possible that the working level dialogue and high level meeting in September may not happen," they added.

"It is also possible that these meetings go ahead but do little to change the trajectory of the trade war."

There was also some positive news in the latest economic data.

According to the Federal Office of Statistics, German factory orders increased at a month-on-month pace of 2.5% in June (consensus: 0.5%), driven by a 8.6% jump in orders from outside the euro area.

But market commentary was quick to point out the role played by orders for 'big ticket' items, with even the German economy ministry reportedly saying that the sector had not yet reached a turning point.

Shares of Vivendi outperformed a falling market after announcing its intention to sell a 10.0% stake in Universal Music Group to China's Tencent.