GLOBAL MARKETS-Trump tariff salvo batters European stocks, sparks bond rally

* Trump to impose 10% tariffs on rest of U.S. imports from
China
* European stocks drop 2.7%, biggest daily fall in 2019
* Interest rate futures price in Fed rate cut in Sept
* Yen marks biggest gain in 2 years, gold hovers near 6-year
high
* U.S. stock futures indicate down 0.3-0.4%

By Karin Strohecker
LONDON, Aug 2 (Reuters) - European stocks posted their
biggest drop of 2019 on Friday and German bond yields hit record
lows after U.S. President Donald Trump fired his latest trade
war salvo at China, jolting markets and sparking a frenzied bid
for safe-haven assets.
Trump vowed to impose a 10% tariff on $300 billion of
Chinese imports from Sept. 1, escalating a bruising and
protracted trade war between the world's two biggest
economies. China said on Friday it would have to take countermeasures.
The abrupt end to a truce in the trade spat capped a
critical week for global markets after the Federal Reserve
delivered a widely anticipated interest rate cut but played down
expectations of many more rate cuts ahead.
Markets around the globe dived into a sea of red, with the
pan-European Stoxx .STOXX dropping 2% in its sharpest daily
tumble of 2019. The trade-sensitive DAX .GDAXI and France's
CAC 40 .FCHI dropped 2.7%, the former hitting a fresh
two-month lows.
"The combination of the Fed delivering a cut but not really
what the market expected or wanted has tightened financial
conditions, and may be partly the reason why Trump has gone for
this escalation," said Gerry Fowler, investment director at
Aberdeen Standard Investments. "It is not good for what was
already weak business sentiment."
MSCI's index of world stocks .MIWD00000PUS dropped 0.6% as
Asian bourses nursed heavy losses. Japan's Nikkei .N225 fell
2.1%, Hong Kong .HSI slumped 2.5% and China mainland stocks
.SSEC .CSI300 declined around 1.5%.
U.S. stocks futures pointed to main indexes opening 0.3%
lower YMc1 ESc1 . On Thursday, the S&P 500 .SPX skidded
0.9% to hit one-month lows overnight.
Trump's announcement, which came a day after U.S. and
Chinese negotiators concluded a meeting in Shanghai without much
progress, marks an end to a trade truce struck in June and could
further disrupt global supply chains. The proposed levies triggered a stampede for safe-haven
assets. Core euro zone bond yields tumbled, with German 10-year
government bond yields DE10YT=RR dropping more than three
basis points to an all-time low of -0.529%. That tracked the
drop in 10-year U.S. Treasuries US10YT=RR yields to 1.832% -
the lowest since Nov. 8, 2016, the day Trump was elected
president.
Trump's move may force the Federal Reserve to cut interest
rates again to protect the U.S. economy from trade-policy risks
after its first rate cut in more than a decade on Wednesday.
Although Fed Chairman Jerome Powell said the rate cut was a
"mid-cycle adjustment" and not a start to a full-blown
rate-cutting cycle, markets aren't fully convinced.
The October Fed funds rate futures FFV9 have jumped to now
fully price in a rate cut in September, compared with only
around 60% before the tariff announcement. Another 25 basis
point move is priced in by December.
"In the grand scheme of things, it will become clearer and
clearer that the Federal Reserve has started an easing cycle and
will have no choice but to cut rates further," said Akira Takei,
fund manager at Asset Management One.
The new tariffs would hit a wide swathe of consumer goods
from cell phones and laptop computers to toys and footwear, at a
time when the manufacturing sector is already reeling from the
accumulative impact of the trade war.
The U.S. Institute for Supply Management said on Thursday
its index of national factory activity fell to 51.2 last month,
the lowest reading since August 2016. In currency markets, the safe-haven Japanese yen JPY=
surged to a five-week high against the dollar and soared to a
2-1/2-year peak against the pound GBPJPY= . The U.S. dollar
.DXY softened a touch against a basket of currencies. /FRX
"How things progress for the U.S. and the US dollar will
depend now much more on whether there are signs that the trade
conflict is increasingly leaving a mark on the U.S. economy,"
Commerzbank FX analyst Esther Reichelt said.
The euro recovered to $1.1099 EUR=EBS , from a two-year low
of $1.1027 hit in U.S. trade. China's onshore yuan slumped to
its lowest since November 2018, falling some 0.7% to 6.9428 per
dollar CNY=CFXS . In the offshore market, the yuan fell to as
low as 6.9778. CNH= .
The British pound held near a 30-month low versus the dollar
as the ruling Conservatives' majority in parliament was reduced
to one seat, adding to concern over politics three months before
the country is due to leave the European Union. GBP= was last 0.1% lower on the day at $1.2116.
In commodity markets, gold XAU= softened a touch to stand
at $1,435.46 per ounce after having risen 2.3% on Thursday,
staying near a six-year high of $1,453 touched two weeks ago.
Oil prices bounced back after suffering a sharp selloff.
O/R
Brent crude LCOc1 rose 2.2% to $61.84 per barrel, after
having fallen 7.0% on Thursday, its biggest daily percentage
drop since February 2016. U.S. West Texas Intermediate (WTI)
CLc1 crude rebounded 1.9% to $54.96, having shed 7.9% the
previous day.

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