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Fears that an escalating trade war between the United States and China will slash global economic growth pulled world stock markets down to near two-and-a-half-month lows on Wednesday and continued to feed a rally in safe-haven government bonds.

German bond yields fell deeper into negative territory and inched toward record lows of minus 0.2 per cent. Ten-year U.S. Treasury note yields dropped to 20-month lows, having fallen almost 30 basis points this month.

Chinese newspapers warned on Wednesday that Beijing could use rare earths to strike back at the United States after U.S. President Donald Trump remarked he was “not yet ready” to make a deal with China over trade. China was the source of 80 per cent of the rare earths imported by the United States between 2014 and 2017.

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The prospect of a prolonged standoff between the world’s two biggest economies and the likelihood of Europe and Japan getting dragged in have raised investor concerns about global growth.

With economic data showing that U.S. manufacturing growth dropped to 10-year lows, another round of tariffs would sharply raise the risk of a U.S. recession, said Justin Onuekwusi, a fund manager at Legal & General Investment Management.

“The market is simply calculating what the impact will be of the next set of tariffs as it doesn’t look like the rhetoric is calming down,” Onuekwusi said.

“Then we have a weaker growth outlook ... so we have the negative shock of trade added to lower growth and the cushion of protection isn’t as good as it was eight to nine months ago.”

Those concerns dragged MSCI’s global equity index down 0.9 per cent to a 2 1/2-month low following losses across Asia.

Canada’s main stock index fell on Wednesday as the Bank of Canada held interest rates steady as expected.

The Toronto Stock Exchange’s S&P/TSX Composite index was unofficially down 165.99 points, or 1.02 per cent, at 16,131.47.

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Health care stocks plummeted 3.2 per cent, the most among the 11 major sectors.

The energy sector reversed early losses and rose 1.2 per cent, as Canadian Natural Resources Ltd. and Husky Energy Inc. jumped 3.8 per cent and 2.4 per cent, respectively.

The rate-sensitive financials sector slipped 1 per cent.

Canada Goose Holdings plunged 31.1 per cent, the most on the TSX, after the high-end winter clothing maker posted its slowest revenue growth in eight quarters and forecast even slower sales growth for the next three years.

The Canadian dollar weakened to a near five-month low against the greenback on Wednesday before paring its decline, as the Bank of Canada was less hawkish than some investors had expected and as global trade tensions weighed on financial markets.

The central bank left its overnight rate at 1.75 per cent but said there was increasing evidence that the economic slowdown was temporary and that growth accelerated in the second quarter.

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“It seemed like the market was expecting a more hawkish Bank of Canada and what it got was a neutral Bank of Canada,” said Bipan Rai, North America head of FX strategy at CIBC Capital Markets. “The initial knee-jerk reaction was for the loonie to move lower.”

Money markets appeared skeptical that Canada’s trade-dependent economy will pick up, indicating that chances of an interest rate cut this year are about 50 per cent, unchanged from before the rate decision.

Global stocks and the price of oil, one of Canada’s major exports, fell as China signaled it was ready to use rare earths to strike back in its trade war with the United States, stoking concerns that the stand-off could hurt the global economy.

The Canadian dollar was trading 0.2 per cent lower at 1.3519 to the greenback, or 73.97 U.S. cents. The currency touched its weakest intraday level since Jan. 3 at 1.3547.

Toronto’s stock market will nudge higher over the rest of the year, but investors will need to wait until the second half of 2020 for the index to better April’s record peak as global trade tensions weigh on company earnings, a Reuters poll found.

Canadian government bond prices were higher across a flatter yield curve, with the two-year up 3 Canadian cents to yield 1.521 per cent and the 10-year rising 16 Canadian cents to yield 1.558 per cent.

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U.S. stocks fell on Wednesday, with the S&P 500 and Nasdaq closing just above a key support level, as worries that a lengthy trade war between the United States and China would crimp global growth pushed investors into the safety of government bonds.

The Dow Jones Industrial Average fell 220.89 points, or 0.87 per cent, to 25,126.88, the S&P 500 lost 19.44 points, or 0.69 per cent, to 2,782.95, and the Nasdaq Composite dropped 60.04 points, or 0.79 per cent, to 7,547.31.

The pan-European STOXX 600 index lost 1.43 per cent.

Concerns over the fate of Britain’s exit from the European Union also helped drive U.S. 10-year yields about 10 basis points below the three-month rates, an inversion typically seen as a leading indicator of a recession. The inversion is the deepest in almost 12 years.

“What I see as more consistent is that typically when the yield curve inverts you get central bank easings. So the question about recession would be: would the U.S. Fed ease enough to avoid a recession?” said Chris Rands, Sydney-based fixed income portfolio manager at Nikko Asset Management.

Data this week showed a gauge of U.S. manufacturing activity unexpectedly fell in May from the previous month. That follows earlier disappointing readings on U.S. manufacturing and industrial output, Rands added.

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“The fact that you have got a bit more noise around the trade war now at the same time as manufacturing is rolling over — it’s getting people to think that things are a little bit worse than they had expected,” he said.

Currency activity was muted, with the dollar index, tracking the U.S. unit against six major currencies, up at 97.905. The dollar is on track for a fourth month of gains, benefiting from flows away from markets such as Asia that are considered at greater risk from trade wars.

The euro was unchanged at $1.1159 after falling two straight days. The British pound held at $1.2656.

Oil prices fell in volatile trade on Wednesday, weighed down by equity markets as China signaled readiness to escalate the trade war with the United States, stoking concerns that an ongoing stand-off could hurt demand.

Supply constraints linked to the Organization of the Petroleum Exporting Countries’ output cuts and political tensions in the Middle East offered some support, however.

Brent crude futures, the international benchmark for oil prices, ended the session at $69.45 a barrel, down 66 cents, or 0.9 per cent, having hit a session low of $68.08.

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U.S. West Texas Intermediate (WTI) crude futures fell 33 cents, or 0.6 per cent, to settle at $58.81 per barrel, after hitting a low of $56.88, the lowest since March 12.

Both contracts were set for a monthly decline.

In the United States, cash crude markets in Cushing, Oklahoma and fuel markets in the area have been roiled this week by pipeline outages and disruptions due to flooding in the Midwest after heavy rains.


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