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GLOBAL MARKETS-Trade tensions flare sours rate hope rally

Karin Strohecker

* Trump tweets on lack of progress in Mexico talks

* German bund yields hit fresh record low

* Mexican peso takes added blow on Fitch downgrade

* Oil steady after falling to five-month low

LONDON, June 6 (Reuters) - German bond yields plumbed new record lows on Thursday and U.S. treasury yields resumed their fall as renewed trade tensions doused a rally fueled by hopes for more central bank stimulus ahead of a European Central Bank meeting.

Sentiment had soured on a lack of progress in talks between U.S. and Mexican officials and President Donald Trump issuing a fresh threat to hit China with tariffs on "at least" another $300 billion worth of Chinese goods.

The latest flare up in tensions follows a mixed bag of economic data that rekindled woes over the health of the world's top economies but also spurred expectations that central banks could ride to the rescue.

While MSCI's broadest index of Asia-Pacific shares outside Japan and the Nikkei eased a touch, the pan-European STOXX 600 rose 0.6%, with Germany's DAX up 0.5% while France's CAC gained 0.7%.

However, gains in Europe were driven by defensive sectors such as utilities, real estate and consumer staples rather than riskier sectors.

"We are still caught in this whirlwind of conflicting economic and corporate stories... we are getting mixed political signals, and quite mixed economic news," said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.

"We have not seen people move away from safe haven assets."

Much focus was also on the auto sector after Italy's Fiat Chrysler Automobiles MV abandoned its $35 billion offer for Renault SA, the latter seeing its shares tumble as much as 8%.

Wall Street looked to open higher with e-Mini futures for the S&P 500 pointing to a 0.2% rise. U.S. stocks had ended Wednesday in the black.

KEEPING IT SAFE

Investors also sought out safe haven assets. Two-year Treasury yields struck their lowest since December 2017 in response, while futures have priced in around 68 basis points of easing by December.

The yield on Germany's 10-year government bond - seen as one of the safest assets in the world - fell to new all-time lows ahead of the EBC's June meeting.

Policymakers are expected to try to give an ailing euro zone economy a boost and may even set the stage for more action later this year as an escalating global trade war saps growth and unravels the benefits of years of ECB stimulus.

In a long-flagged move, the ECB is likely to offer to pay banks if they borrow cash from the central bank and pass it on to households and firms.

In currency markets, the safe-haven yen was again in demand and nudged the dollar down 0.2% to 108.19. The dollar lingered against a basket of currencies to trade at 97.234 , having bounced from a seven-week low overnight.

The euro traded at $1.1240 after briefly stretching as high as $1.1306 on Wednesday.

"We expect the ECB to turn more dovish and push the euro lower," said CBA FX analyst Joseph Capurso.

"We expect the ECB to change their forward guidance on interest rates and to trim their macroeconomic projections and modify their forward interest rate guidance because of low inflation and heightened uncertainty about global trade."

Meanwhile Mexico's peso suffered under a double whammy from trade woes and ratings agency Fitch downgrading the country's credit rating to BBB, while Moody's changed its outlook to negative from stable. All of this saw the dollar jump 0.7% against a beleaguered Mexican peso.

In commodity markets, all the chatter of rate cuts helped lift gold to 15-week highs and the precious metal was last trading at $1,332.71 per ounce.

Oil prices flatlined after diving overnight when the Energy Information Administration (EIA) reported the largest build in crude oil and oil product inventories since 1990.

U.S. crude was at $51.94 a barrel after having hit its lowest since January, while Brent crude futures stood at $60.91.

(Reporting by Karin Strohecker, additional reporting by Wayne Cole in Sydney, Editing by Sam Holmes and Toby Chopra)