* Asian stock markets : https://tmsnrt.rs/2zpUAr4
* Trump slaps tariffs on Mexico in surprise tweet
* China PMI disappoints with drop to 49.4 in May
* Asia stocks in the red, Nikkei down almost 7% for the
month
* Bonds jump on safe-haven rush, U.S. yields at fresh lows
* Markets see recession risk, price in deeper Fed rate cuts
By Wayne Cole
SYDNEY, May 31 (Reuters) - Asian shares sank and sovereign
bonds surged on Friday as investors feared U.S. President Donald
Trump's shock move to slap tariffs on Mexico risked tipping the
United States, and maybe the whole world, into recession.
The outlook darkened further when a key measure of Chinese
manufacturing activity disappointed for May, questioning 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 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 and sparking a rush to
safe harbours.
"The threat of U.S. tariffs on Mexico to take effect inside
two weeks is a sharp blow to investor sentiment," said Sean
Callow, a senior FX analyst at Westpac.
"Mexico is the U.S.'s largest trading partner and a flare-up
in trade tensions was definitely not on the market radar," he
added. "This is obviously a major setback for CAD, MXN and the
thousands of US businesses that use Mexican-made products."
Yields on the 10-year Treasury note US10YT=RR quickly fell
to a fresh 20-month low of 2.18%, while the dollar jumped 1.8%
on the Mexican peso MXN= . E-Mini futures for the S&P 500
ESc1 sank 0.9%, leading Asian bourses lower.
Japan's Nikkei .N225 fell 1.1%, to be down 6.9% for the
month so far. MSCI's broadest index of Asia-Pacific shares
outside Japan .MIAPJ0000PUS eased 0.2% and was off a hefty 7.7
for the month.
Investors clearly feared that opening a new front in the
trade wars would threaten global and U.S. growth, and 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 hard blow when the core personal consumption expenditures
(PCE) index, the Fed's favoured measure of inflation, was
revised down sharply to 1% for the first quarter, from 1.3%.
The increase was the smallest in four years and pushed
inflation further below the Fed's 2% target. Trump's tariff threat only added to the dangers and the
market further narrowed the odds on Fed easing this year.
Futures 0#FF: imply 43 basis point 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 32 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 are 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 98.119 .DXY .
The euro EUR=EBS was huddled at $1.1130, having shed 0.75%
for the month. The safe haven yen has been faring better and was
holding a small monthly gain on the dollar at 109.24 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 edged up 0.2% to $1,291.64
per ounce XAU= .
Oil prices added to losses on fears a global economic
slowdown would crimp demand. O/R
U.S. crude CLc1 was last down 57 cents at $56.02 a barrel,
while Brent crude LCOc1 futures lost 60 cents to $66.27.
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(Editing by Sam Holmes & Shri Navaratnam)