May 6, 2019 / 10:51 AM / 20 days ago

UPDATE 2-Investors seek euro zone havens as Trump ups pressure on China

* Core euro zone bond yields fall as Trump threatens China

* Final PMI shows stronger Germany, though slow growth in bloc

* Italy hit by renewed coalition stability concerns (Updates pricing)

By Virginia Furness

LONDON, May 6 (Reuters) - Core euro zone bonds yields fell on Monday as investors sought safe havens after U.S. President Donald Trump threatened to raise tariffs on China, while PMI data pointed to anaemic growth in the euro zone.

Trump’s move marked an escalation in tensions between the world’s largest economies and a shift in tone from the president, who had cited progress in trade talks as recently as Friday.

Global equity markets fell, with China’s main indexes down 5 percent. Treasuries rallied after Trump said tariffs on $200 billion of goods would rise on Friday to 25 percent from 10 percent.

Trump also said he would target a further $325 billion of Chinese goods with 25 percent tariffs “shortly”, essentially covering all products imported to the United States from China.

Germany’s 10-year government bond yield, the benchmark for the region hit a low of -0.008 percent, turning negative for the first time since April 30. It was last down one basis point on the day to 0.01 percent.. “Everyone was quite optimistic that they were close to a deal … “ said Daniel Lenz, rates strategist at DZ Bankit. Trump’s threat “may cause the opposite action, talks might come to a stop, which is the fear everyone has.”

Most other core 10-year yields in the bloc fell by up to two basis points before pulling back to trade flat on the day ,.

Data on Monday painted a mixed picture of euro zone economic growth. Germany’s services stood out among a gloomier bloc-wide report from research firm Markit’s final purchasing manager data for April.

German services created jobs in April at the fastest rate in more than a decade, offsetting deteriorating manufacturing, the data showed. But overall, weakness in euro zone manufacturing increasingly affected the dominant services industry.

IHS Markit’s Euro Zone Composite Final Purchasing Managers’ Index (PMI), considered a good measure of overall economic health, dipped to 51.5 in April from March’s 51.6.

However, overall investor improved for the third month in a row, reaching its highest since November 2018, the Sentix research group said on Monday.

ITALY IN FOCUS

Italian government bonds underperformed the rest of the periphery. Concerns about the stability of the Italian government added to worries about global trade.

Italian Deputy Prime Minister Luigi di Maio said on Monday a graft case involving a junior minister from the ruling League party would trigger a government crisis only if the League itself pushed for it.

Italy’s short-dated bonds were up to six basis points higher before pulling back to around three basis points up on the day. The spread of its 10-year debt over Germany’s widened to nearly 260 basis points for the first time since April 30, before pulling back to 255 basis points

Reporting by Virginia Furness, editing by Larry King and Jane Merriman

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