GLOBAL MARKETS-U.S. Treasury yields drop, stocks slide on weak factory data, tariffs

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* 10-year Treasury yields hit lowest since July 2016
* All three major U.S. stock indexes in the red
* U.S. factory activity contracted in August - ISM
* Dollar briefly hits more than two-year high
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(Updates to U.S. afternoon trading)
By Stephen Culp
NEW YORK, Sept 3 (Reuters) - Benchmark 10-year U.S. Treasury
yields fell to their lowest level since July 2016 on Tuesday,
and all three major U.S. stock indexes were in the red amid
heightened trade worries and a contraction in U.S. factory
production.
European shares were also hurt by concerns over a global
economic slowdown and uncertainty over Britain's exit from the
European Union.
As new tariffs on Chinese goods took effect over the U.S.
holiday weekend, market participants appear to be losing faith
that the world's two largest economies will reach a near-term
resolution to their long-running trade war, which has whipsawed
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 presidential election.
"This is a risk-off trade day," said Robert Pavlik, chief
investment strategist, senior portfolio manager at SlateStone
Wealth LLC in New York. "It's really just more concerns about
the health of the economy complimented by trade and Brexit,
manifesting itself in higher gold prices, a higher dollar and
lower Treasury yields."
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.
"(The ISM data) was confirmation that manufacturing has been
in a decline since reaching a peak a year ago," Pavlik added.
"It's not a great sign, not the kind of sign you want to see in
a slowing economy."
The Dow Jones Industrial Average .DJI fell 380.78 points,
or 1.44%, to 26,022.5, the S&P 500 .SPX lost 28.71 points, or
0.98%, to 2,897.75 and the Nasdaq Composite .IXIC dropped
104.21 points, or 1.31%, to 7,858.67.
European stocks pulled back from a 1-month high after the
disappointing U.S. PMI data compounded worries of a global
economic sluggishness, 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
0.67%.
U.S. Treasury yields fell, with the benchmark 10-year yield
at 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 14/32 in price
to yield 1.459%, down from 1.506% late on Friday.
The 30-year bond US30YT=RR last rose 27/32 in price to
yield 1.9373%, down from 1.973% late on Friday.
Trade and Brexit concerns drove the dollar against a basket
of major world currencies to its highest level since mid-May
2017, but the greenback paired its gains following the release
of the ISM factory data. The dollar index .DXY rose 0.03%, with the euro EUR= up
0.05% to $1.0972.
The Japanese yen strengthened 0.28% versus the greenback at
105.93 per dollar, while Sterling GBP= was last trading at
$1.2098, up 0.27% on the day.
Rising OPEC and Russian production, combined with demand
concerns due to a global economic slowdown dragged down oil
prices. U.S. crude CLcv1 fell 2.69% to $53.62 per barrel and Brent
LCOcv1 was last at $57.93, down 1.24% on the day.
Gold prices rose more than 1%, with the safe-haven precious
metal hovering just below its more than six-year high of
$1,554.56. Spot gold XAU= added 1.0% to $1,546.21 an ounce.
Copper CMCU3 lost 0.16% to $5,611.00 a tonne.
Three-month aluminum on the London Metal Exchange CMAL3
rose 0.31% to $1,754.50 a tonne.

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