Global stocks fall and bonds skyrocket against Trump's Mexican threat By Reuters

By Karin Strohecker

LONDON (Reuters) – European stocks fell and sovereign bonds jumped on Friday as investors feared that President Donald Trump's threat of tariff increases in Mexico would tip the US into recession, as data disappointing news about China aggravated the situation.

Markets aggressively absorbed the Federal Reserve's larger rate cuts this year, as US bond yields hit new lows and some parts of the curve reversed, which is seen as a signal from the Fed. Alarm from the recession of the world's largest economy.

Washington will impose a tariff of 5% from June 10, which would then rise to 25% until illegal immigration crossing the southern border is halted. Trump announced the decision on Twitter late Thursday, capturing the markets completely by surprise.

"Very clearly, while we all thought that the major trade tensions in the world were between the United States and China or perhaps between the United States and Europe, we had not realized that there would be another trade tension with Mexico … and this raises concerns about who will be the next country, "said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.

The mood of investors is still clouded when a key measure of Chinese manufacturing activity in May disappointed, raising questions about the effectiveness of stimulus measures taken by Beijing. This has also raised concerns about the health of the global economy more broadly.

"It's a bad slowdown, it should take longer than expected.Many thought that the slowdown would be in Q1 and recovery in Q2, but it is clear that everything we see in May tells us that it will be pushed back. in Q3 or Q4, "added Milligan.

The 10-year Treasury note yields fell rapidly to a 20-month low of 2.17%, while the dollar surged more than 3% on the Mexican peso.

In Europe, the pan-European fell by 1%, falling to its lowest level for more than three months, while Germany, trade-sensitive, lost 1.4%. All sectors were in the red, although car manufacturers recorded a decline of more than 2%, while Volkswagen (DE 🙂 and Fiat Chrysler – both heavily exposed in Mexico – fell by 4%.

Spanish banks exposed in Mexico – Santander (MC :), Sabadell and Bilbao – also suffered.

Wall Street – on track for the first monthly decline of 2019 – also forecast significant falls, with futures on e-Mini for the open market, which indicated a lower opening of 1%.

Asian stocks fell in the beginning, but some attracted bargain hunting at the end of the month after enduring a few torrid weeks. The MSCI's largest share of Asia Pacific ex-Japan shares edged up 0.2%, but remains down 7.4% for the month.

China's first-order index closed slightly lower hopes that Beijing should now step up its stimulants containing losses. Japan fell 1.6%, driven by sharp declines by automakers, and lost 7.1% over the month. ()

Investors have clearly felt that the opening of a new front in trade wars would prompt central banks around the world to consider new stimulus measures.

On Thursday, Vice Chairman of the Board of Governors Richard Clarida said the central bank would act if inflation remained too low or if global and financial risks jeopardized the economic outlook.

"What Clarida did in the comments, is to clarify in the minds of many people the answer to the question of whether low and above inflation would be enough for the Fed Softer – the answer seems to be "yes," said Ray Attrill. , responsible for the foreign exchange strategy at the National Australia Bank.

"This has reinforced the current market expectations of easing the Fed's monetary policy in the second half of this year."

In fact, the temporary slowdown in inflation had a negative impact when the main personal consumption expenditure index, the Fed's preferred measure of inflation, was revised downward from 1.3% 1% for the first quarter.

Trump's tariff threat has only made the dangers worse and the market has further reduced the chances of the Fed easing this year and next year. Futures contracts involve no less than 44 basis points of redemptions by the end of the year of the effective fund rate of 2.38%.

BOND BID, YEN SURGE

Bonds extended their upward trend with 10-year Treasury yields, down 33 basis points for the month and a decisive level below the overnight rate. US 3-month yields were about 20 basis points higher than 10-year Treasuries, the largest reversal since 2007.

Such a reversal of the yield curve foreshadowed enough recessions in the past for investors to bet that the Fed will be forced to relax its policy in the same way as "insurance".

Yet Treasury stocks are far from the only ones to recover, as yields on 10-year benchmark bonds in Germany are flirting with newer record lows.

In the foreign exchange market, the dollar recorded the biggest one-day fall against the Japanese yen, a safe haven since March, at 0.7%. Against a basket of currencies, the dollar pulled 0.2% to 97.975.

The euro also fell sharply against the Japanese yen and lost nearly 0.5% to 121.34 after hitting its lowest level since the January 3rd crash.

The Chinese yuan is set at its worst month since last July and was heading towards the crucial figure of $ 7 per dollar. Sterling was on the verge of experiencing the biggest monthly drop in the year, with Theresa May 's imminent departure, as the prime minister deepened fears of a chaotic divorce from the European Union.

In commodity markets, it 's firmed at 0.2%, to stand at $ 1,293.33 the ounce. Oil prices have fallen to their lowest level in nearly three months, fearing that a slowdown in the global economy will dampen demand. was down 57 cents to 56.02 dollars a barrel, while futures lost 95 cents to 65.92 dollars. [O/R]