GLOBAL MARKETS-Bond bulls boosted as trade tensions send recession signals

(Updates throughout, changes byline, dateline)
*
* Pan-European share index down more than 1%
* E-Minis for S&P500 fall 0.6%
* U.S. Treasury yields at the lowest since September 2017
* German Bund yields at 2 1/2-year low;

By Sujata Rao
LONDON, May 29 (Reuters) - With no sign Sino-U.S. trade
tensions will let up and fears of an Italy-European Union
confrontation growing again, the global bond rally accelerated
on Wednesday, as investors dumped shares and scurried for the
safety of German and U.S. government debt.
German yields fell deeper into negative territory and inched
towards record lows around minus 0.2%. Ten-year U.S. Treasury
bond yields reached 20-month lows, having fallen almost 30 basis
points this month.
Wall Street was set to open lower, with S&P500 futures down
half a percent ESc1 after a weak close on Tuesday, following
U.S. President Donald Trump's comment that he was "not yet
ready" to make a deal with China over trade.
Chinese newspapers responded on Wednesday with a warning
Beijing could use rare earths to strike back at the United
States
The prospect of a prolonged standoff between the world's two
biggest economies and the likelihood of Europe and Japan getting
dragged in are making investors seriously worried about global
growth.
Recent economic data, such as purchasing-manager surveys,
have disappointed -- U.S. manufacturing growth dropped to
10-year lows.
Another round of tariffs would sharply raise U.S. recession
risk, said Justin Onuekwusi, a fund manager at Legal & General
Investment Management.
"The market is simply calculating what the impact will be of
the next set of tariffs as it doesn't look like the rhetoric is
calming down," Onuekwusi said.
"Then we have a weaker growth outlook ... so we have the
negative shock of trade added to lower growth and the cushion of
protection isn't as good as it was eight to nine months ago."
Those concerns pushed MSCI's global equity index 0.4% lower
to a 2 1/2-month low .MIWD00000PUS following losses across
Asia .MIAJ0000PUS .N225 .AXJO
European shares opened lower, with Germany's exporter-heavy
index down 1% .STOXX .GDAXI and a pan-European share
benchmark losing 1.3%.
On the political front, the news was gloomy, too.
Eurosceptic parties gained in recent EU elections, Austria and
Greece face elections and Italy's dispute with the European
Commission over its budget may be escalating In Britain, many reckon risks of a hard Brexit -- crashing
out of the EU without a trade agreement in place -- have risen,
because candidates lining up to succeed Prime Minister Theresa
May are mostly eurosceptic.
All those concerns drove U.S. 10-year yields US10YT=RR
about 10 basis points below the 3-month rates, an inversion
typically seen as a leading indicator of a recession. The
inversion is the deepest in almost 12 years.
"What I see as more consistent is that typically when the
yield curve inverts you get central bank easings. So the
question about recession would be: would the U.S. Fed ease
enough to avoid a recession?" said Chris Rands, Sydney-based
fixed income portfolio manager at Nikko Asset Management.
U.S. rates futures are pricing in two cuts by the Federal
Reserve by the middle of next year to help prop up the country's
economy. FEDWATCH
Data this week showed a gauge of U.S. manufacturing activity
unexpectedly fell in May from the previous month.
That follows earlier disappointing readings on U.S.
manufacturing and industrial output, Rands added.
"The fact that you have got a bit more noise around the
trade war now at the same time as manufacturing is rolling over
-- it's getting people to think that things are a little bit
worse than they had expected," he said.
The gap between two and 10-year German Bund yields was the
narrowest in 2 1/2 years. Ten-year Bunds now yield minus 0.17%
and are down 10 bps since the start of May DE10YT=RR
DE2DE10=RR .
Some of the flows into Bunds are being spurred by an
escalation between Italy's ruling coalition and the EU, which is
said to be considering punishing Rome for excessive spending.
Italian Deputy Prime Minister Matteo Salvini, emboldened by
his party's strong EU election showing, has stepped up promises
to slash taxes and is calling for new EU budget rules, raising
fears his plans will drive up Italy's huge public debt.
Italian 10-year bond yields rose for the third day in a row
to 2.73% IT10YT=RR .
Onuekwusi, however, prefers Italian bonds over their
negative-yielding German counterparts, arguing the EU was
unlikely to impose too severe a punishment.
"If you look at Europe's political landscape, the last thing
the (EU authorities) would want to do is to stir up any more
negative EU sentiment," he said.
Currency activity was muted, with the dollar index .DXY up
at 97.905. The dollar is on track for its fourth straight month
of gains, benefiting from flows away from markets such as Asia
that are considered at greater risk from trade wars.
The euro EUR=D3 was unchanged at $.1.1159 after falling
two straight days. The British pound GBP=D3 held at $1.2656.
Commodity markets were also dominated by fears of a global
economic downturn. Brent crude LCOc1 was off more than 1% at
$69.15 per barrel. Gold benefited from the safe-haven bid,
rising half a percent to $1.285 an ounce.

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