LONDON (Reuters): European stocks posted their biggest drop of 2019 on Friday and bond yields tumbled to record lows after US President Donald Trump fired another trade war salvo at China, sparking a frenzied dash for safe-haven assets.
Trump said he would impose a 10% tariff on US$300bil of Chinese imports from Sept 1, escalating a bruising and protracted clash between the world's two biggest economies. China said on Friday it would take countermeasures.
The abrupt end to a truce in the trade conflict capped a critical week for global markets after the US Federal Reserve delivered a widely anticipated interest rate cut but played down expectations of many more ahead.
News that Trump will make an announcement about trade with the European Union at 1745 GMT on Friday did little to soothe frayed nerves.
Markets around the globe dived into a sea of red, with the pan-European Stoxx dropping 2% in its sharpest daily tumble of 2019. The trade-sensitive DAX and France's CAC 40 dropped 2.7%, the former hitting a two-month lows.
"The market's looking very, very nervous," said Stephane Barbier de la Serre, adding that Trump's move also ramped up the pressure on the Fed to deliver more rate cuts.
"Trump didn't get the rate cut he wanted, so he's going to force (the Fed) to do that. That's frightful. And what will China do? What will the Fed do? It's hijacking of monetary policy." MSCI's index of world stocks dropped 0.6% as Asian bourses suffered heavy losses. Japan's Nikkei fell 2.1%, Hong Kong slumped 2.4% and China mainland stocks declined around 1.5%.
The toxic cocktail of unmet expectations for central bank policy, trade war turmoil, Brexit woes and worries over the health of the corporate sector has wiped US$1 trillion off world stocks this week.
Futures pointed to no let-up for US markets: S&P 500 e-minis indicated 0.5% lower while Nasdaq 100 e-minis slipped 0.9%.
Trump's announcement, which came a day after US 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 dropping to an all-time low of -0.502% and the country's entire government bond yield curve turning negative for the first time ever.
That tracked the drop in 10-year US Treasuries yields to 1.832% - the lowest since Nov. 8, 2016, the day Trump was elected president.
Trump's move may force the Fed to cut rates again to protect the US economy from trade-policy risks.
Although Fed Chairman Jerome Powell said Wednesday's cut - its first in more than a decade - was a "mid-cycle adjustment" and not the start of an easing cycle, markets are not fully convinced.
Data on Friday showed US jobs growth slowed in July and wages picked up moderately, providing further incentive to cut rates.
The October Fed funds rate futures have jumped to 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 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 US 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, safe haven bets took the limelight. The Japanese yen surged to 16-month high against the dollar, while the Swiss franc reached a two-year high of 1.0925 against the euro.
The dollar softened 0.2% against a basket of currencies.
"How things progress for the US 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 $1.1096, from a two-year low of $1.1027 hit in US trade.
China's offshore yuan weakened 0.2% after in early trade touching 6.9769 per dollar - its lowest since November 2018.
The British pound held near a 30-month low versus the dollar as the governing 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. Sterling last stood at US$1.2137.
In commodity markets, gold softened a touch to US$1,440.15 per ounce after having risen 2.3% on Thursday, staying near a six-year high of US$1,453 touched two weeks ago.
Oil prices bounced back after suffering a sharp selloff.
Brent crude rose 2.8% to US$62.19 per barrel, after having fallen 7.0% on Thursday, its biggest daily percentage drop since February 2016. US West Texas Intermediate (WTI) crude rebounded 2.6% to US$55.34, having shed 7.9% the previous day.