* Asian stock markets : https://tmsnrt.rs/2zpUAr4
* Trump menaces Mexico with tariffs in surprise tweet
* Markets see recession risk, price in deeper Fed rate cuts
* China PMI disappoints with drop to 49.4 in May
* S&P 500, European stock futures in the red
* Asia shares draw month-end demand in wake of steep losses
* Bonds jump on safe-haven rush, U.S. yields at fresh lows
By Wayne Cole
SYDNEY, May 31 (Reuters) - U.S. stock futures slid and
sovereign bonds surged on Friday as investors feared President
Donald Trump's shock threat of tariffs on Mexico risked tipping
the United States, and maybe the whole world, into recession.
The investor mood darkened further when a key measure of
Chinese manufacturing activity for May disappointed, raising
questions about the effectiveness of Beijing's stimulus steps.
Markets moved aggressively to price in deeper rate cuts by
the Federal Reserve this year, while bond yields touched fresh
lows and curves inverted further in a warning of recession.
Washington will impose a 5% tariff from June 10, which would
then rise steadily to 25% until illegal immigration across the
southern border was stopped. Trump announced the decision on Twitter late Thursday,
catching markets completely by surprise.
"The mercurial President Trump has signalled via Twitter
this morning that his mindset is shifting ever farther from
reaching trade deals," warned Eleanor Creagh, a strategist at
Saxo Capital Markets Australia.
"It seems now that market participants are finally realising
that the narrative of an H2/19 recovery is fast dissipating,"
she added. "As escalating trade tensions across the globe cause
growth expectations to be recalibrated, risk off sentiment will
remain and volatility will increase."
Yields on the 10-year Treasury note US10YT=TWEB quickly
fell to a fresh 20-month low of 2.17%, while the dollar jumped
1.7% on the Mexican peso MXN= .
E-Mini futures for the S&P 500 ESc1 slid 0.8% and FTSE
futures FFIc1 0.4%. Germany's DAX FDXc1 shed 0.7%.
Asian shares fell at first, only to draw month-end bargain
hunting having endured a torrid few weeks. MSCI's broadest index
of Asia-Pacific shares outside Japan .MIAPJ0000PUS edged up
0.3%, though it was still down a whopping 7.3% for the month.
China's blue chip index .CSI300 held steady, partly on
talk Beijing would now have to ramp up its stimulus, but again
was nursing loses of 6.8% for May.
Japan's Nikkei .N225 fell 1.3%, dragged down by big falls
in car makers, which left it off 7.1% for the month. .T
Investors clearly reckoned that opening a new front in the
trade wars would pressure central banks everywhere to consider
new stimulus.
On Thursday, Federal Reserve Board of Governors Vice Chair
Richard Clarida had said the central bank would act if inflation
stays too low or global and financial risks endanger the
economic outlook. "What the Clarida's comments have done is clarify in many
people's minds the answer to the questions of whether low
inflation proving more than transitory would itself be enough to
get the Fed to ease – the answer appears to be 'yes'," said Ray
Attrill, head of FX strategy at National Australia Bank.
"That served to reinforce prevailing market expectations
that the Fed will be easing in the second half of this year."
Indeed, the case that the inflation slowdown was temporary
took a blow when the core personal consumption expenditures
index, the Fed's favoured measure of inflation, was revised down
to 1% for the first quarter, from 1.3%. Trump's tariff threat only added to the dangers and the
market further narrowed the odds on Fed easing this year and
next. Futures 0#FF: imply no less than 44 basis points of cuts
by year end in the current effective funds rate of 2.38%.
YIELD INVERSION = RECESSION RISK
Bonds extended their bull run with 10-year Treasury yields
now down a steep 33 basis points for the month and decisively
below the overnight funds rate.
Such an inversion of the yield curve has presaged enough
recessions in the past that investors are wagering the Fed will
be forced to ease policy just as "insurance".
Yet Treasuries are hardly alone in rallying, with bond
yields across Europe either at or near record lows. Yields in
Australia and New Zealand have also hit an all-time trough on
expectations of rate cuts there.
Those declines have kept the U.S. dollar relatively
attractive from a yield point of view and it was trading near a
two-year high against a basket of currencies at 98.115 .DXY .
The euro EUR=EBS was huddled at $1.1129, having shed 0.7%
for the month. The safe-haven yen fared better as the dollar
lost 0.6% on the day to a three-month low of 108.94 JPY= .
Sterling GBP=D3 was poised for the biggest monthly drop
in a year as the imminent departure of Theresa May as prime
minister deepened fears about a chaotic divorce from the
European Union. The pound was last at $1.2611 GBP=D3 and nursing a 3.2%
loss for the month so far.
In commodity markets, spot gold firmed 0.4% to $1,293.33 per
ounce XAU= .
Oil prices fell to their lowest in almost three months on
fears a global economic slowdown would crimp demand. O/R
U.S. crude CLc1 was last down 55 cents at $56.04 a barrel,
while Brent crude LCOc1 futures lost 91 cents to $65.96.
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Asia stock markets https://tmsnrt.rs/2zpUAr4
Asia-Pacific valuations https://tmsnrt.rs/2Dr2BQA
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(Editing by Sam Holmes & Shri Navaratnam)