GLOBAL MARKETS-Flare in trade tensions sours rate-hope rally

* Trump tweets on lack of progress in Mexico talks
* German bund yields hit fresh record low
* Mexican peso takes added blow on Fitch downgrade
* Oil steady after falling to five-month low

(Updates figures, adds quote)
By Karin Strohecker
LONDON, June 6 (Reuters) - German bond yields fell to new
lows on Thursday and U.S. treasury yields resumed their fall as
renewed trade tensions doused a rally fuelled by hopes for more
central bank stimulus ahead of a European Central Bank meeting.
Sentiment had soured on a lack of progress in talks between
U.S. and Mexican officials and President Donald Trump issuing a
fresh threat to hit China with tariffs on "at least" another
$300 billion worth of Chinese goods. The latest flare up in tensions follows a mixed bag of
economic data that rekindled woes over the health of the world's
top economies but also spurred expectations that central banks
could ride to the rescue.
While MSCI's broadest index of Asia-Pacific shares outside
Japan .MIAPJ0000PUS and the Nikkei .N225 eased a touch, the
pan-European STOXX 600 STOXX rose 0.6%, with Germany's DAX
.GDAXI up 0.7% while France's CAC .FCHI gained 0.6%.
However, gains in Europe were driven by defensive sectors
such as utilities, real estate and consumer staples rather than
riskier sectors.
Wall Street looked to open higher with e-Mini futures for
the S&P 500 ESc1 pointing to a 0.3% rise. U.S. stocks had
ended Wednesday in the black. "We are still caught in this whirlwind of conflicting
economic and corporate stories... we are getting mixed political
signals, and quite mixed economic news," said Andrew Milligan,
head of global strategy at Aberdeen Standard Investments.
"We have not seen people move away from safe haven assets."
Much focus was also on the auto sector after Italy's Fiat
Chrysler Automobiles MV FCHA.MI abandoned its $35 billion
offer for Renault SA RENA.PA . Shares in the former were
broadly flat, while the latter recovered somewhat after tumbling
as much as 8%. IT SAFE
Investors also sought out safe haven assets. Two-year
Treasury yields US2YT=RR struck their lowest since December
2017 in response, while futures have priced in around 68 basis
points of easing by December. FEDWATCH
The yield on Germany's 10-year government bond - seen as one
of the safest assets in the world - plummeted to new all-time
lows ahead of the EBC's June meeting.
Policymakers are expected to try to give an ailing euro zone
economy a boost and may even set the stage for more action later
this year as an escalating global trade war saps growth and
unravels the benefits of years of ECB stimulus.
In a long-flagged move, the ECB is likely to offer to pay
banks if they borrow cash from the central bank and pass it on
to households and firms. In currency markets, the safe-haven yen was again in demand
and nudged the dollar down 0.26% to 108.17 JPY= . The dollar
lingered against a basket of currencies to trade at 97.267
.DXY , having bounced from a seven-week low overnight.
The euro traded at $1.1235 EUR= after briefly stretching
as high as $1.1306 on Wednesday.
"We expect the ECB to turn more dovish and push the euro
lower," said CBA FX analyst Joseph Capurso.
"We expect the ECB to change their forward guidance on
interest rates and to trim their macroeconomic projections and
modify their forward interest rate guidance because of low
inflation and heightened uncertainty about global trade."
Meanwhile Mexico's peso suffered under a double whammy from
trade woes and ratings agency Fitch downgrading the country's
credit rating to BBB, while Moody's changed its outlook to
negative from stable. All of this pushed the dollar up 0.6%
against a beleaguered Mexican peso MXN= . MSCI's emerging market currency index .MIEM00000CUS was
1.1% down.
"There's a general sense of unease," said Tilmann Kolb,
emerging markets FX rates and macro analyst at UBS. "Fed
Chairman Jerome Powell's comments this week were positive, but
the ongoing tensions in China and Mexico are negative and high
risk is never good for emerging markets."
In commodity markets, all the chatter of rate cuts helped
lift gold close to their highest level this year and the
precious metal was last trading at $1,336.67 per ounce XAU= .
Oil prices flatlined after diving overnight when the Energy
Information Administration (EIA) reported the largest build in
crude oil and oil product inventories since 1990. O/R
U.S. crude CLc1 was at $51.96 a barrel after having hit
its lowest since January, while Brent crude LCOc1 futures
stood at $61.24.

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