Global equities tumbled and safe-haven sovereign bonds surged Friday after President Donald Trump’s unexpected threat of tariffs on Mexican goods added to fears that escalating trade wars will push the US and other major economies into recession.
The yield on Germany’s 10-year government bond - regarded as one of the safest assets in the world - fell to a record low while US Treasury yields slipped to 20-month lows.
Washington says it will impose a 5.0 per cent tariff beginning June 10, which would then rise steadily to 25 per cent until illegal immigration across the southern border is stopped.
Trump tweeted the decision late Thursday, catching markets by surprise, reports Reuters.
A key measure of Chinese manufacturing activity for May also came in below expectations, raising questions about the effectiveness of Beijing’s stimulus steps and the health of the global economy.
MSCI’s gauge of stocks across the globe shed 0.67 per cent.
On Wall Street, the Dow Jones Industrial Average fell 264.12 points, or 1.05 per cent, to 24,905.76, the S&P 500 lost 27.46 points, or 0.98 per cent, to 2,761.4 and the Nasdaq Composite dropped 76.86 points, or 1.02 per cent, to 7,490.86.
The benchmark S&P 500 is down 6.2 for the month, its first monthly decline for the year to date.
The pan-European STOXX 600 index lost 0.87 per cent. Carmakers led the retreat by dropping nearly 3.0 per cent, while Volkswagen and Fiat Chrysler - both significantly exposed to Mexico - tumbled 3.6 per cent and 5.0 per cent.
Spanish banks with exposure to Mexico - Santander, Sabadell and Bilbao - also suffered.
Bonds extended their bull run with 10-year Treasury yields now down around a steep 35 basis points for the month and decisively below the overnight funds rate.
US 3-month yields were some 20 basis points above those on 10-year Treasury bonds, the biggest inversion since 2007.
In currency markets, the dollar suffered the biggest one day fall against the safe haven Japanese yen since March at 0.8 per cent. Against a basket of currencies, the dollar pulled 0.1 per cent lower to trade at 98.013.
The euro also fell sharply against the Japanese yen and was down nearly 0.6 per cent at 121.23 after touching the lowest since a Jan. 3 flash crash.
In commodity markets, spot gold firmed 0.7 per cent to $1,297.3 per ounce. Oil prices fell to a near-three month low on fears a global economic slowdown would crimp demand.
US crude was last down just over $1 at $55.57 a barrel, while Brent crude futures lost nearly $2 to $65.09.
