(Updates ahead of ECB meeting and U.S. markets open )

*

Bund yields edge higher again after biggest jump since

1990s

*

Euro steadies at 4-month high ahead of expected ECB rate

cut

*

Stock markets take a breather as trade war tensions simmer

By Marc Jones

LONDON, March 6 (Reuters) - World financial markets

remained in a radical readjustment phase on Thursday after U.S.

President Donald Trump's shakeup of the transatlantic

relationship spurred a seismic half-a-trillion-euro shift in

German defense and infrastructure spending.

The European Central Bank was gearing up to cut its interest

rates again in around an hour's time.

That would normally suck up traders' attention. But it was

just one of a myriad factors in play, with a global bond market

selloff still in full swing a day after the 10-year German Bund

yield - a major driver of worldwide borrowing costs - saw its

biggest rise since the 1990s.

Those Bund yields were up 7 basis points at

2.85%, having gone as high as 2.929% on Wednesday. The euro was

resting at a 4-month high versus a deflated dollar

while European stocks also took a breather

after a 10% rally this year.

"The reality is that I still don't think the enormity of the

(German) news has got close to being fully comprehended and

digested by global investors yet," said Deutsche Bank's Jim

Reid, who estimated that Wednesday's Bund yield spike was the

biggest move since German reunification.

"This is a seismic shift of the most epic proportions and

perhaps only fast money and nimble investors have responded so

far."

The global implications had been evident overnight.

Japan's 10-year government bond yield, another key driver of

worldwide borrowing costs, had hit a near 16-year high and the

U.S. 10-year Treasury note yield was rising again in

early U.S. trading despite rising bets on more Federal Reserve

rate cuts following recent patchy data there.

Focus also remained on the global trade war after 25% U.S.

tariffs on imports from Mexico and Canada were imposed on

Tuesday along with fresh duties on Chinese goods.

The White House had said on Wednesday that Mexican and

Canadian carmakers would be exempted from their countries'

tariffs for one month as long as they complied with existing

free trade rules.

That had lifted Asian markets overnight but Wall Street

futures pointed to another fall for the S&P 500 index when it

resumes. A difficult run of eight falls in the last 10 sessions

has left it in the red for the year.

MSCI's broadest index of Asia-Pacific shares outside Japan

meanwhile had closed up 1.25% and Tokyo's Nikkei

finished 0.8% higher.

China's blue-chip index rose another 1.4% while

Hong Kong's Hang Seng Index surged over 3%, hitting its

highest in three years and cementing a major world

market-topping 20% 2025 surge.

ECB RESPONSE

The ECB's expected interest rate cut was looming large at

1315 GMT and now had even more of a spotlight in the wake of the

mass rearmament drive in Germany and the rest of Europe.

European leaders were holding an emergency meeting in Brussels

on support for Ukraine, after U.S. President Donald Trump's

suspension of military aid to Kyiv this week fanned fears the

region can no longer rely on U.S. protection in place since

World War Two.

The euro was steady at $1.08, just shy of a four-month peak

it had touched in early Asian trading. The single currency is on

course for a rise of more than 4% this week, its strongest

weekly performance since March 2009.

"This (ECB) meeting could be very interesting given the

current context," said Julien Lafargue, chief market strategist

at Barclays Private Bank.

Not only is the bank getting close to the so-called

"neutral" level of interest rates following its recent run of

cuts, but Christine Lagarde will most certainly be asked about

how the ECB intends to respond to the Europe-wide increase in

defence spending, Lafargue said.

In commodities, gold prices were fractionally lower at

$2,904 per ounce as traders await the U.S. non-farm payrolls

report on Friday for cues on the Federal Reserve's policy path.

Oil prices tried to catch a break after stumbling this week,

undermined by a larger than expected jump in U.S. crude stocks,

OPEC+ plans to increase output and U.S. tariffs on key oil

supplies.

Brent futures were at $69.7 a barrel, hovering close

to an over three-year low touched on Wednesday.

($1 = 0.9247 euros)