GLOBAL MARKETS-Global stocks drop on fears of expanding trade war

(Updates through close of U.S. trading)
By David Randall
NEW YORK, May 31 (Reuters) - Global equities tumbled and
safe-haven sovereign bonds surged Friday after U.S. President
Donald Trump's unexpected threat of tariffs on Mexican goods
added to fears that escalating trade wars will push the U.S. and
other major economies into recession.
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. Treasury yields slipped to 20-month lows.
Washington says it will impose a 5% tariff beginning June
10, which would then rise steadily to 25% until illegal
immigration across the southern border is stopped. Trump tweeted
the decision late Thursday, catching markets 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 realized 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.
A key measure of Chinese manufacturing activity for May also
came in below expectations, raising questions about the
effectiveness of Beijing's stimulus steps and the health of the
global economy.
"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.
MSCI's gauge of stocks across the globe .MIWD00000PUS shed
0.76%.
On Wall Street, the Dow Jones Industrial Average .DJI fell
354.84 points, or 1.41%, to 24,815.04, the S&P 500 .SPX lost
36.8 points, or 1.32%, to 2,752.06 and the Nasdaq Composite
.IXIC dropped 114.57 points, or 1.51%, to 7,453.15.
The benchmark S&P 500 dropped nearly 6.6% for the month, its
first monthly decline for the year to date, after hitting a
record high in late April.
The pan-European STOXX 600 index .STOXX lost 0.81%.
Carmakers led the retreat by dropping nearly 3%, while
Volkswagen and Fiat Chrysler - both significantly exposed to
Mexico - tumbled 3.6% and 5%.
Spanish banks with exposure to Mexico - Santander, Sabadell
and Bilbao - also suffered.
Bonds extended their bull run with 10-year Treasury yields
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.
In currency markets, the dollar suffered the biggest one day
fall against the safe haven Japanese yen since March at 0.8%.
Against a basket of currencies, the dollar pulled 0.1% lower to
trade at 98.013.
The euro also fell sharply against the Japanese yen and was
down nearly 0.6% at 121.23 after touching the lowest since a
Jan. 3 flash crash.
China's yuan is set for its worst month since July last year
and was heading towards the crucial 7 per dollar figure.
Sterling was plumbing its lowest level in nearly five months 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.
In commodity markets, spot gold firmed 0.7% to $1,297.30 per
ounce. Oil prices fell to a near three-month low on fears a
global economic slowdown would crimp demand. U.S. crude fell
nearly 6% to $53.26 barrel, while Brent crude lost 3.6% to
$64.47.

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