GLOBAL MARKETS-U.S. Treasury yields drop, stocks slide as global slowdown fears loom

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* 10-year Treasury yields hit lowest since July 2016
* All three major U.S. stock indexes slide
* U.S. factory activity contracted in August - ISM
* Safe-haven gold prices surge
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(Updates to U.S. market close)
By Stephen Culp
NEW YORK, Sept 3 (Reuters) - Benchmark 10-year U.S. Treasury
yields fell on Tuesday to their lowest since July 2016 and all
three major U.S. stock indexes lost ground in a risk-off session
driven by heightened trade worries and an unexpected contraction
of U.S. factory activity.
European shares also dipped over global economic slowdown
worries and uncertainties surrounding Britain's chaotic exit
from the European Union.
New tariffs on Chinese goods took effect over the U.S.
holiday weekend. Hopes appear to be dimming that the world's two
largest economies will reach a near-term resolution to their
long-running trade war, which has shaken markets for months and
strained world economies.
U.S. President Donald Trump said bilateral trade talks with
China were going well, but warned he would be "tougher" if
negotiations extend beyond the 2020 U.S. presidential election
and he is re-elected. U.S. manufacturing output shrank in August for the first
time in 3-1/2 years, according to the Institute for Supply
Management's Purchasing Managers Index (PMI), stoking fears that
the global economic slowdown has reached American shores.
"Today we had economic data that's providing reinforcement
to bearish economic argument, and it's the first trading day
since new tariffs were put in place," said Chuck Carlson, chief
executive officer at Horizon Investment Services in Hammond,
Indiana. "People are seeing global economic slowdown coming to
fruition and taking money off the table."
But Carlson cautioned against giving too much weight to
market behavior on the first trading day following the
unofficial end of summer.
"It's the first day back after August and you're getting the
students back to class," Carlson added. "You'll have a better
read next week."
The Dow Jones Industrial Average .DJI fell 285.26 points,
or 1.08%, to 26,118.02, the S&P 500 .SPX lost 20.19 points, or
0.69%, to 2,906.27 and the Nasdaq Composite .IXIC dropped
88.72 points, or 1.11%, to 7,874.16.
European stocks backed off from 1-month highs after the
disappointing U.S. PMI data fueled worries of global economic
softness, while uncertainty over Britain's hard exit from the
European Union put an end to the FTSE 100's four-day winning
streak. The pan-European STOXX 600 index .STOXX lost 0.23% and
MSCI's gauge of stocks across the globe .MIWD00000PUS shed
0.52%.
U.S. Treasury yields fell, with the benchmark 10-year yield
dipping to its lowest since July 2016 after the downbeat ISM
report exacerbated worries about a weakening global economy in
the shadow of the U.S.-China trade war. Benchmark 10-year notes US10YT=RR last rose 11/32 in price
to yield 1.4708%, down from 1.506% late on Friday.
The 30-year bond US30YT=RR last rose 7/32 in price to
yield 1.9639%, down from 1.973% late on Friday.
Trade and Brexit concerns drove the dollar to its highest
level against a basket of major currencies since mid-May 2017,
but the greenback erased its gains following the dismal ISM
factory data. The dollar index .DXY rose 0.1%, with the euro EUR= down
0.01% to $1.0965.
The Japanese yen strengthened 0.14% versus the greenback at
106.08 per dollar, while Sterling GBP= was last trading at
$1.2079, up 0.11% on the day.
The disappointing U.S. factory data also drove oil prices
lower, as concerns over the weakening global economy undermined
the demand outlook. U.S. crude oil futures settled at $53.94 per barrel, down
0.68%, while Brent crude futures settled down 2.11% at $58.26
per barrel.
Gold prices surged more than 1%, with the safe-haven
precious metal hovering within shouting distance of its more-
than-six-year high of $1,554.56 per ounce. Spot gold XAU= added 1.0% to $1,544.95 an ounce.
Copper CMCU3 lost 0.18% to $5,610.00 a tonne.
Three-month aluminum on the London Metal Exchange CMAL3
rose 0.34% to $1,755.00 a tonne.

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Implied FX volatility: G7 FX, GBP https://tmsnrt.rs/2Po7AHT
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