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* Automakers rise as investors unwind short positions - analyst
* Banks, insurers underperform after U.S. yields drop
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TOKYO, June 10 (Reuters) - Japan's Nikkei surged to near two-week highs on Monday morning led by automakers in reaction to U.S. President Donald Trump withdrawing his threat to impose tariffs on Mexican imports, after Mexico agreed to strengthen immigration enforcement.
The Nikkei share average rose 1% to 21,090.38, after earlier hitting as high as 21,150.47, its highest since May 28.
U.S. equity futures rose when trading resumed on Sunday after the United States and Mexico struck a deal late Friday to avert a tariff war, with Mexico agreeing to meet U.S. demands to stem the flow of illegal Central American migrants.
Trump had threatened to impose 5% import tariffs on all Mexican goods starting on Monday if Mexico did not commit to do more to tighten its borders.
Automakers soared, with Toyota Motor Corp rising 1.2%, Honda Motor Co advancing 1% and Mazda Motor Corp surging 1.2%. Japanese automakers have long built vehicles in Mexico, taking advantage of the country's cheap labour, trade deals and proximity to the United States, the world's largest auto market after China.
"Investors are unwinding their short positions as risk sentiment shot up," said Nobuhiko Kuramochi, a strategist at Mizuho Securities. "Receding concerns about U.S.-Mexican trade issues and hopes for loose monetary policy are raising investors' risk appetite."
On Friday, U.S. shares rose on hopes that the U.S. Federal Reserve would move to cut rates after job numbers came in weaker than expected.
Conversely, U.S. Treasury yields tumbled, with 10-year yields hitting their lowest since September 2017.
That pulled down Japanese financials firms, which hunt for higher yields, with Mitsubishi UFJ Financial Group and Mizuho Financial Group dropping 0.5%, while T&D Holdings and Dai-ichi Life Holdings sliding 1%.
"U.S. short-term yields would stay pressured for a while, but hopes that the Fed would cut rates as a preventive measure before the economy enters a recession are cheering investors," Kuramochi said.
Mobile carriers bucked the strength and were sold after the Nikkei business daily reported that in order to make it easier for customers to switch mobile phone contracts and increase competition among carries, the government will require major carries to slash the penalty fees from 9,500 yen to below 1,000 yen, when customers cancel their contracts within two years.
NTT Docomo and SoftBank Corp both dropped 1.5%, while KDDI Corp shed 2%.
The broader Topix rose 1.1% to 1,548.73.