By Wayne Cole
SYDNEY (Reuters) – Asian stocks fell and government bonds rose Friday when investors feared US president Donald Trump's shock moved to sleep rates on Mexico risking tipping the US, and perhaps the whole world, into recession.
The prospect became even darker when a key goal of Chinese manufacturing activity was disappointed for May, the question of the effectiveness of Beijing's stimulus step.
Markets moved aggressively to price in deeper price fluctuations of the Federal Reserve this year, while bond yields affected fresh downturns and curves conversely in a recession warning.
Washington will impose a 5% tariff from June 1[ads1]0, which will then rise evenly to 25% until illegal immigration over the southern border was stopped.
Trump announced the decision on Twitter late on Thursday, capturing markets quite surprisingly and sparkling a rush to safe ports.
"The threat of US rates on Mexico to take effect within two weeks is a strong blow to the investor's feelings," said Sean Callow, a senior financial analyst at Westpac.
"Mexico is America's largest trading partner and a resurgence in trade tensions was definitely not on the market radar," he added. "This is obviously a major setback for CAD, MXN and thousands of US companies using Mexican products."
The yield on the 10-year government bond loan fell rapidly to a fresh 20-month low of 2.18%, while the dollar jumped 1.8% on the Mexican peso. E-Mini futures for sank 0.9%, leading Asian stocks lower.
Japan fell 1.1%, to be down 6.9% for the month so far. MSCI's widest Asia-Pacific stock index outside Japan increased by 0.2% and was out of a strong 7.7 for the month.
Investors feared clearly that opening a new front in the trade war would threaten global and US growth and pressure central banks everywhere to consider new stimulants.
On Thursday, the Federal Reserve Board's Vice Chairman Richard Clarida said the central bank would act if inflation become too low or global and economic risks threaten the economic outlook.
"What Clarida's comments have made clear in many people's minds, the answer to the questions of low inflation proves more than transient would in itself be enough to make the Fed ease – the answer seems to be yes," Ray says. Attrill, Head of FX Strategy at National Australia Bank.
"This served to strengthen prevailing market expectations that the Fed will ease in the second half of this year."
In fact, the downturn in inflation was temp Orary tok a hard blow when the core item for personal consumption expenditure (PCE), Fed's preferred inflation rate, was revised strongly to 1% for the first quarter, from 1.3%.
The increase was at least four years and further pushed inflation below Fed's 2% Targets
Trump's tax threat was only added to the danger and the market further increased Fed relief increases this year, Futures involving 43 basis points of cuts at year-end in today's effective 2.38% fund price.
YI ELD INVERSION = RECESSION RISK
Bonds increased their customs clearance with 10-year government bonds, now down steeply 32 basis points for the month and decisively below the overnight rate.
Such an inversion of the yield curve has prepaid enough setbacks earlier, that investors bet the Fed will be forced to ease the policy just like "insurance".
Nevertheless, Treasuries are almost not alone in rallying, with bond yields across Europe, either at or near record highs. Dividends in Australia and New Zealand have also taken a full-time creep on expectations of price reductions there.
These declines have kept the US dollar relatively attractive from an interest point, and it traded close to a two-year high against a basket of currencies of 98,119.
The euro was huddled at $ 1.1130, having cut 0.75% for the month. The security yen has been far better and held a small monthly gain on the dollar of 109.24.
Sterling was ready for the biggest monthly drop in a year as the impending departure of Theresa May as prime minister deep fears of a chaotic divorce from the European Union.
The pound was last at $ 1,2611 and caring for a 3.2% loss for the month so far.
In the commodity markets went up 0.2% to $ 1.291.64 per ounce.
Oil prices were added to losses on fear a global economic downturn would shrink demand.
was last down 57 cents at $ 56.02 per barrel, while futures lost 60 cents to $ 66.27.