By Laila Kearney
NEW YORK (Reuters) - Global stocks fell on Wednesday, plagued by a flattening yield curve that sparked concerns about an economic slowdown in the United States and weakening expectations of a lasting U.S.-China trade truce, while the dollar steadied.
U.S. markets were closed to mark former President George H.W. Bush's death, but the effect of Wall Street's turmoil in the previous session, when New York-listed shares tumbled more than 3 percent, was felt in Asia and Europe.
The MSCI's all-country index <.MIWD00000PUS> shed 0.5 percent.
Tuesday's markets chaos came a day after equities boomed on optimism that China and the U.S. had temporarily called a tariff ceasefire to sort out their trade dispute. But doubts began soon after along with President Donald Trump threatening "major tariffs" on Chinese imports if his administration failed to reach an effective trade deal with Beijing.
"As I look into next year, most expectations for further gains have been pared back. Investors have gone from extended bullishness at the start of the year on equities to an uncomfortable neutrality," said Paul O'Connor, head of multi-asset at Janus Henderson.
Trump's comments, alongside the drop in U.S. stocks and bond yields, pushed Asian shares outside Japan <.MIAPJ0000PUS> 1.4 percent lower. The pan-European STOXX 600 index (.STOXX) lost 1.16 percent.
Markets across the world have been rattled by recession fears, exemplified by the flattening U.S. Treasury yield curve.
The benchmark Treasury 10-year yield fell to its lowest point since mid-September on Tuesday, while the spread between the 10-year yield over its two-year counterpart also shrank to the smallest since the start of the financial crisis in January 2008. That signaled to some investors an approaching U.S. economic slowdown.
The flattening of the curve gained momentum after last week's signal by the Federal Reserve that it may be nearing an end to its three-year rate-increase cycle.
The dollar steadied on Wednesday after it took a hard hit in the early reaction to recession concerns and the initial thaw in trade tensions between Washington and Beijing sapped demand for the safe-haven greenback.
The greenback rose 0.32 percent against the Japanese yen and the euro gave up all its early gains to trade down 0.04 percent against the dollar.
Gold, which moves inversely with the dollar, slipped on expectations of more rate hikes following remarks from a U.S. Federal Reserve official and as some investors booked profits after prices climbed to their highest in more than five weeks.
Palladium, on the other hand, surpassed the bullion for the first time in about 16 years, to hit a record high of $1,263.56 per ounce as higher speculative interest and larger supply deficit boosted the auto-catalyst metal.
Markets are also bracing for more news on Brexit. British Prime Minister Theresa May suffered embarrassing defeats on Tuesday, the start of five days of parliamentary debate over her plans to leave the European Union.
The pound rose off 17-month lows of $1.2659 (GBP=D3) hit on Tuesday to around $1.2751, up 0.3 percent on the day, amid creeping optimism that Britain could opt to stay in the EU after all.
The threat of slowing economic activity also weighed on oil prices, but oil prices went higher on Wednesday ahead of a meeting of the world's biggest exporters who will discuss cutting output to help shore up prices and curb excess supply.
Brent crude (LCOc1) futures rose 39 cents to $62.47 a barrel. U.S. West Texas Intermediate (WTI) crude (CLc1) futures rose 37 cents to $53.62 a barrel.
(This story refiles to fix typographical error in lead paragraph)
(Additional reporting by Sujata Rao, K. Sathya Narayanan, Shinichi Saoshiro in Tokyo, Virginia Furness and Saikat Chatterjee in London; Editing by Nick Zieminski)