* Trade, economic fears wipe nearly $3 trillion off global
stocks
* 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
* Europe stocks tumble, U.S. futures in the red
* Bonds jump on safe-haven rush, U.S. yields at fresh lows
By Karin Strohecker
LONDON, May 31 (Reuters) - Safe-haven sovereign bonds surged
and European stocks tumbled on Friday as investors feared
President Donald Trump's shock threat of tariffs on Mexico
risked tipping the United States into recession while
disappointing China data added to the woes.
The yield on Germany's 10-year government bond - regarded as
one of the safest assets in the world - fell to a record low
while U.S. yields slipped to near multi-year troughs.
Markets also moved aggressively to price in deeper rate cuts
by the Federal Reserve in 2019, parts of the curve inverted
further, seen as a warning signal for recession in the world's
largest economy.
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 tweeted the decision late
Thursday, catching markets completely by surprise.
"Very clearly when we all thought that the main trade
tensions in the world were between the U.S. and China or perhaps
between the U.S. and Europe, we hadn't realised there will be
another trade tension with Mexico...and it raises concerns about
who the next country may be," said Andrew Milligan, head of
global strategy at Aberdeen Standard Investments.
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.
This also sparked concerns over the health of the global economy
more widely. "It is a nasty slowdown, it looks likely to be taking longer
than we thought. Many thought that the slow down would be in Q1
and the recovery in Q2, but clearly everything that we see in
May is telling us this will be pushed back into Q3 or Q4,"
Milligan added.
Yields on the 10-year Treasury note US10YT=TWEB quickly
fell to a fresh 20-month low of 2.17%, while the dollar jumped
more than 3% on the Mexican peso MXN= .
On stock markets, the pan-European STOXX 600 .STOXX
dropped 1.6%, slumping to a more than three-month low with
Germany's trade sensitive DAX .GDAXI down 1.8%. All sectors
were in the red, but falls were led by carmakers dropping nearly
3% while Volkswagen VOWG_p.DE and Fiat Chrysler FCHA.MI -
both significantly exposed to Mexico - tumbled 3.6% and 5%.
Spanish banks with exposure to Mexico - Santander SAN.MC ,
Sabadell SABE.MC and Bilbao BBVA.MC - also suffered.
Wall Street - on track for the first monthly decline of 2019
- also looked in line for sizeable falls, with e-Mini futures
for the S&P 500 ESc1 pointing to a 1.3% drop on open.
MSCI's broadest index of Asia-Pacific shares outside Japan
.MIAPJ0000PUS edged up 0.2%, but is still down a whopping 7.4%
for the month. China's blue chip index .CSI300 closed a touch
lower with hopes Beijing would now have to ramp up its stimulus
containing losses. Japan's Nikkei .N225 dropped 1.6% on the
day and 7.1% on the month. .T
Looking at MSCI's All Country World Index .MIWD00000PUS ,
the toxic cocktail of trade war fears and economic worries has
wiped nearly $3 trillion of global stocks in May.
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 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%.
BOND BID, YEN SURGE
Bonds extended their bull run with 10-year Treasury yields
US10YT=RR now down around a steep 35 basis points for the
month and decisively below the overnight funds rate. U.S.
3-month yields were some 20 basis points above those on 10-year
Treasury bonds, the biggest inversion since 2007.
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. Germany's
benchmark 10-year bond yield hit fresh record lows.
In currency markets, the dollar suffered the biggest one day
fall against the safe haven Japanese yen JPY= since March at
0.8%. Against a basket of currencies, the dollar pulled 0.1%
lower to trade at 98.013 .DXY .
The euro also fell sharply against the Japanese yen
EURJPY= and was down nearly 0.6% at 121.23 after touching the
lowest since a Jan. 3 flash crash.
China's yuan CNH= is set for its worst month since July
last year and was heading towards the crucial 7 per dollar
figure. Sterling GBP= was plumbing its lowest level in nearly
five month and 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.
GBP/
In commodity markets, spot gold firmed 0.7% to $1,297.3 per
ounce XAU= . Oil prices fell to a near-three month low on fears
a global economic slowdown would crimp demand. U.S. crude CLc1
was last down just over $1 at $55.57 a barrel, while Brent crude
LCOc1 futures lost nearly $2 to $65.09. O/R
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Nearly $3 trillion wiped of world stocks in May https://tmsnrt.rs/2KcmRHm
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