* Trade war concerns grow as July 6 deadline nears
* China stocks hovers near more than 2 year lows
* Merkel says compromise reached on migration issue
* RBA seen to keep rates steady at record low
By Tomo Uetake
TOKYO, July 3 (Reuters) - Asian shares dropped in tentative morning trade on Tuesday as sentiment remained fragile in the face of tense trade relations between the United States and major economies, with investors braced for another potentially rocky day for Chinese markets.
Investors, worried the trade row could derail a rare period of synchronized global growth, have pulled out of riskier assets in the past month or so.
The Asia Pacific MSCI index ex-Japan dropped 0.66 percent on early Tuesday trade, while Japan’s Nikkei average was little changed.
In China, the Shanghai Composite Index shed 0.23 percent and the blue chip CSI300 index fell 0.19 percent.
The Shanghai bourse hit more than two-year lows on Monday, and the yuan fell amid jitters ahead of a July 6 deadline when the United States is set to impose tariffs on $34 billion worth of goods from China, the epicentre of a heated trade dispute between Washington and major economies that has convulsed financial markets.
Beijing is expected to respond with tariffs of its own on U.S. goods as the trade fight between the world’s two biggest economies threatens to damage global trade and investment.
“I detected increasing alarm over trade tensions and a lot of nervousness about a full blown trade war, which comes at a bad time for China where the economy is undergoing a downdraft at the same time the United States is seeing a sharp upturn,” said Aninda Mitra, Singapore-based senior sovereign analyst at BNY Mellon Investment Management, who visited Shanghai last week.
“There is undoubtedly cause for concern, but not alarm on the prospects for the Chinese yuan. A lot of people are not thinking through the range of outcomes and the limitations on policy flexibility from a seemingly inexorable slide into an escalating trade war.”
On Monday, the Chinese yuan, fresh off its worst month on record, lost more ground against the dollar to close at 6.6660. In early deals on Tuesday, the yuan came under more pressure.
Elsewhere in currency markets, the euro, which had been pressured by political uncertainty in Germany, pared losses in late U.S. trade on reports Chancellor Angela Merkel’s conservatives settled a row over migration that threatened to topple her governing coalition after interior minister Horst Seehofer dropped his threat to quit.
The euro was fetching $1.1630 after shedding 0.45 percent overnight.
The Reserve Bank of Australia (RBA) holds its monthly policy meeting later on Tuesday and is considered certain to maintain rates at 1.5 percent, where they have been since mid-2016.
Focus was on whether the RBA makes a mention of the recent U.S.-China trade tensions.
The Aussie was steady at $0.7338 after dropping to $0.7311 overnight, its lowest since January 2017.
The dollar was steady at 110.895 yen after edging up 0.2 percent the previous day, supported by robust U.S. economic data, higher Treasury yields and a bounce in shares on Wall Street.
Oil prices bounced back in early Asian trade on Tuesday, with Brent crude rising 0.41 percent to $77.30 per barrel and West Texas Intermediate (WTI) crude was up 0.32 percent to $73.94 a barrel.
Reporting by Tomo Uetake Editing by Shri Navaratnam