GLOBAL MARKETS-Global recession fears hit stocks, bonds rally

(Updates prices throughout, adds European futures at open)
* Asian stock markets : https://tmsnrt.rs/2zpUAr4
* MSCI ex-Japan off 0.5%, Chinese blue-chip index pare
losses
* E-Minis for S&P500 fall 0.3%
* U.S. Treasury yields at the lowest since September 2017

By Swati Pandey
SYDNEY, May 29 (Reuters) - Asian shares fell on Wednesday
and bonds rallied as investor sentiment soured over growing
worries about world growth with trade tensions between the
United States and China showing no signs of easing.
MSCI's broadest index of Asia-Pacific shares outside Japan
.MIAPJ0000PUS slipped 0.5% after three straight days of gains.
Chinese shares started on the back foot but bounced off early
losses to be marginally higher. Australian shares .AXJO ended
0.7% lower while Japan's Nikkei .N225 faltered 1.2%.
In an indication U.S. markets will fall again on Wednesday,
E-Minis for the S&P 500 ESc1 stumbled 0.3%. In early European
trading, the pan-region Euro Stoxx 50 futures STXEc1 were down
0.7% as were German DAX futures FDXc1 while those for London's
FTSE FFIc1 and France's CAC 40 FCEc1 eased 0.6% each.
Risk aversion has increased globally in recent days as fears
of world recession resurfaced amid disappointing macro data in
major economies. Wins for eurosceptic parties in EU elections as
well as a snap poll in Greece and political turmoil in Austria
have added to the gloomy outlook. Italy's dispute with the European Commission over its budget
is also a major overhang for world markets. In Asia, focus remains on the ongoing Sino-U.S. trade war.
U.S. President Donald Trump said on Monday that Washington was
not prepared to make a deal with China yet. In response, Chinese
newspapers warned on Wednesday Beijing is ready to use rare
earths to strike back at the United States.
The tariff skirmish is not limited to China, though. Trump
has also pressed Japan to reduce its trade imbalance with the
United States. The spectre of prolonged trade friction 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. German Bund yields are also on a slippery slope.
"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.
"My reading of what is going on at the moment is that U.S.
economic data seems to be flicking away, and the market is
starting to tell us that rate cuts will eventually be coming,"
Rands added.
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.
Analysts at Citi reckon punitive measures against China's
Huawei and other tech firms, as part of the tariff battle, could
undermine global productivity growth.
"Technological rivalry is here to stay," Citi analyst
Johanna Chua said in a note, adding "it is hard to be
constructive (on) risk assets in Asia at this juncture."
"We maintain a bias to be long U.S. dollar-Asia...As growth
is likely to significantly outweigh inflation concerns, we
expect Asian central banks bias will remain on the accommodative
side."
In currencies, activity was muted.
The dollar index .DXY was a touch lower at 97.905 but well
above a recent two-week trough of 97.547.
The euro EUR=D3 was unchanged at $.1.1159 after two
straight days of falls while the British pound GBP=D3 held at
$1.2656.
In commodity markets, oil prices were subdued on Wednesday
as worries the Sino-U.S. trade war could trigger a global
economic downturn dominated, despite the risk of supply
shortfall from U.S. floods and political tensions in the Middle
East. O/R
Brent crude LCOc1 was last off 51 cents at $69.60 per
barrel while U.S. crude CLc1 eased 62 cents to $58.52 per
barrel.

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(Editing by Sam Holmes & Shri Navaratnam)