LONDON (Reuters) - Stock markets reversed earlier gains on Monday after U.S. President Donald Trump said he would restore tariffs on some imports from Brazil and Argentina, overshadowing data showing that the Chinese and euro zone economies were stabilizing.

European stocks had initially rebounded toward four-year highs, as decent manufacturing data in China and renewed optimism over a trade deal between Washington and Beijing eclipsed last week’s jitters. The positive mood also encouraged investors to dump government debt in the euro zone and the United States.

Trump then accused Brazil and Argentina of a “massive devaluation” of their currencies and said he would immediately restore tariffs on U.S. steel and aluminum imports.

The MSCI world equity index .MIWD00000PUS, which tracks shares in 47 countries, gave up its earlier gains but clung to positive territory and remained near last week’s highs.

(GRAPHIC: MSCI world stocks index - here)

In Europe, the Euro STOXX 600 slipped after earlier rising 0.3 percent. The German DAX .GDAXI succumbed to selling pressure. French .FCHI and British .FTSE shares were also in the red.

Wall Street futures, however, remained in positive territory ESc1.

Investors have been sticking with the broad view that a further escalation in the trade war between China, the U.S. and other countries can be avoided, even after last week’s decision by Trump to sign legislation backing protesters in Hong Kong, which enraged China.

Stock markets headed back towards record highs in November as investors bet the worse of the trade war had passed and a fears of a recession receded.

Chinese data did much to help the initial mood on Monday. The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) in November marked its fastest expansion since December 2016.

“What we had in China on the weekend with the two PMIs being above expectation is clearly a good sign in terms of making the global stabilization scenario more credible,” said Francois Savary, chief investment officer at Swiss wealth manager Prime Partners.

Another PMI survey published on Monday showed euro zone manufacturing activity shrank for a 10th consecutive month in November, but it also signaled that the worst may be over.

Savary cautioned that while we do have signs of “economic stabilization” and a decreased risk of deflation, “a lot of positive news has been priced in”.

GERMAN ELECTIONS

Some of the most striking moves in global markets on Monday were in government bonds, where the strong economic numbers and election of new political leaders in Germany prompted a selloff in safe-haven government debt.

The surprise election of new leftist leaders to the Social Democrats (SPD) threatened Germany’s ruling coalition, sparking a jump in German bond yields as markets bet it would ease the path towards fiscal expansion.

The 10-year German bond yield rose more than 7 basis points to as strong as -0.273 percent DE10YT=RR, a three-week high.

U.S. Treasury yields were also notably higher, with the 10-year bond yield up by more than 7 basis points at a two-week high US10YT=RR.

The buoyant mood among investors was also evident in the U.S. dollar, which has tended to perform well on hopes for a trade deal.

It rallied to a six-month high of 109.73 yen JPY=EBS, its strongest against the safe-haven Japanese currency since May, before settling at 109.54 after Trump's tariff announcement.

Currency markets were largely quiet elsewhere, with the euro down marginally against the dollar at $1.1005 EUR=EBS.

Markets are now focused on the U.S. Institute for Supply Management’s November manufacturing survey, which is due at 1500 GMT, for a further gauge of the health of the U.S. economy, followed later in the week by closely watched jobs data.

“The onus is now on the ISM data to see if there is a rebound, and the odds are on a bit of rebound but not a strong one,” said Sebastien Galy, senior macro strategist at Nordea Asset Management.

Oil prices recovered after slumping on Friday on record high U.S. crude production. Expectations that OPEC and its allies are set to extend existing cuts in oil output when they meet this week helped drive the rebound.

Brent crude LCOc1 futures extended earlier gains to $61.99 a barrel, up 2.48 percent. U.S. West Texas Intermediate crude CLc1 gained 2.52 percent to $56.56 per barrel.