Italy Downgrade Casts Gloom Over Euro Zone

(Reuters) - European stocks and government bonds dipped on Monday as weak data from Asia, a rating downgrade for Italy and the slump in oil prices stoked concerns about global growth.

The U.S. dollar bucked the trend, extending gains after a surprisingly strong U.S. labor data on Friday, and adding further pressure on the Russian ruble which has been hurt as oil prices fall back toward five-year lows.

Europe's index of top shares, the FTSEurofirst, opened down 0.4 percent, mirroring a move in Asia after China's trade performance in November was much weaker than expected while Japan's economy in the third quarter shrank even more than initially reported.

The Italian bourse started the day as the worst performer before recovering, after S&P downgraded the credit rating of the euro zone's third largest economy to just one notch above junk on Friday, underscoring the limited progress made by Italy's Prime Minister Matteo Renzi.

Italian government bond yields, which move in the opposite direction to prices, shot higher, pulling up borrowing costs across the bloc.

"The euphoria from Friday's U.S. payrolls is dissipating, we're seeing a bit of profit taking," said Pierre Martin, a trader at Saxo Bank. "Italy's downgrade is a good reminder that Europe is far from being out of the woods."

One of ECB's longest standing policymakers said the euro zone economy was "experiencing a massive weakening," a development that has pushed the central to look closer at sovereign bond purchases.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.3 percent. Tokyo's Nikkei edged up 0.1 percent with the downward revision to Japan's GDP neutralizing much of the positive impact from a weaker yen. South Korea's Kospi lost 0.2 percent while Singaporean and Malaysian shares also dipped.

The Shanghai composite index gained 2.9 percent after the downbeat Chinese data added to hopes that China will implement more stimulus to shore up its economy.

"Shockingly, (China's) imports contracted by 6.7 percent year-on-year – their weakest performance since the Lehman crisis (except the volatile Lunar New Year-related period), said Dariusz Kowalczyk, economist at Credit Agricole in Hong Kong.

"This is partly a reflection of lower commodity prices and base effects, but these two factors cannot fully explain the weak import number and we have to assume that poor domestic demand has played a part. This means that pressure will rise on the government to do more to stimulate growth," he said.

The Australian and the New Zealand dollars, sensitive to the economic fortunes of China, were the main losers among major currencies, touching new 4-1/2 year and 2-1/2 year lows, respectively.

The disappointing Chinese and Japanese data contrasted sharply with Friday's U.S. non-farm payrolls that showed employment in November surged by 321,000, easily topping forecasts for 230,000 new jobs.

Brent crude fell around 1.5 percent to $68.07 a barrel, approaching a five-year low of $67.53 hit last week, with a forecast cut by Morgan Stanley exacerbating the fall.