GLOBAL MARKETS-U.S. sanctions on Huawei send stocks reeling; yields fall

* Latest U.S. sanctions on Huawei undermine market sentiment
* Dutch bond yields hover above negative territory
* Weak U.S. data raises interest rate cut bets
* China stocks gain on government support hopes
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

By Saikat Chatterjee
LONDON, May 16 (Reuters) - European stocks fell, government
bond yields slipped and the Japanese yen firmed on Thursday
after the U.S. government hit Chinese telecoms giant Huawei with
severe sanctions, further straining Sino-U.S. trade ties.
An index of European shares .MSER fell as much as 0.5% in
early European trading with the German stock index .GDAXI down
0.4%. U.S. stock futures .ESc1 were down 0.4%, pointing to a
weak start on Wall Street.
The broad weakness in European markets was somewhat offset
by small gains in Chinese and Hong Kong stock indexes leading to
only marginal losses on a global stock index .MIWD00000PUS as
investors expected state authorities to step in to support the
market and stabilize sentiment.
"Chinese stocks are up as markets expect authorities to
intervene to support sentiment but this kind of activity is not
sustainable and unless we see a clear resolution in the
China-U.S. trade conflict, overall sentiment will remain weak,"
said Neil Mellor, a senior FX strategist at BNY Mellon in
London.
While benchmark indexes in China and Hong Kong were up
between .SSEC .HSI 0.3-0.8% at the close of trading, bond
markets were signalling more pain for risk appetite.
Core German government bond yields DE10YT=RR were flirting
with their lowest level in nearly three years while Dutch bond
yields NL10YT=RR were about to dip into negative territory, a
phenomenon not seen since October 2016.
Late on Wednesday, the U.S. Commerce Department said it was
adding Huawei Technologies Co Ltd HWT.UL and 70 affiliates to
its "Entity List" - a move that bans the company from acquiring
components and technology from U.S. firms without government
approval. The move took global markets by surprise as sentiment had
steadied somewhat in the previous session on news that U.S.
President Donald Trump was planning to delay tariffs on auto
imports after a swathe of weak U.S. and Chinese economic data.
CUT BETS GROW
As trade tensions have made a reappearance on investors'
radars, weak U.S. data has also ratcheted up market expectations
of a U.S. interest rate cut in the coming months.
In the United States, retail sales unexpectedly fell in
April as households cut back on purchases of motor vehicles and
a range of other goods, while industrial production fell 0.5% in
April, the third drop this year. Yields on 10-year U.S. Treasury bonds eased to 2.366%
US10YT=RR , near a 15-month low of 2.340% touched on March 28.
Fed funds rate futures 0#FF: are fully pricing in a rate
cut by the end of this year and more than a 50% chance of a move
by September.
"The markets are inching step by step in pricing in a rate
cut. That is a sea change from a year ago when the consensus was
three to four rate hikes a year," said Akira Takei, bond fund
manager at Asset Management One.
Falling U.S. yields have eroded support for the greenback
with the dollar down 0.1 percent against a basket of its rivals
.DXY .
Oil prices gained on the prospect of mounting tensions in
the Middle East hitting global supplies despite an unexpected
build in U.S. crude inventories.
Brent crude LCOc1 rose 0.3% to $71.99 a barrel, while U.S.
West Texas Intermediate (WTI) crude CLc1 fetched $62.26, also
half a percent higher.
Gold edged up to $1,296.9 per ounce XAU= .
For Reuters Live Markets blog on European and UK stock
markets, please click on: LIVE/

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