*

Bund yields edge higher again after biggest jump since

1990's

*

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 later.

That would normal suck up traders' attention. But 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, that

remained core.

Those Bund yields were up 10 basis points at

2.88%, having gone as high as 2.929% on Wednesday. The euro was

resting at a 4-month high 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 rose for a third

day too despite rising bets on more Federal Reserve rate cuts.

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, stoking fears

about economic growth.

But on Wednesday, the White House said President Trump would

exempt Mexican and Canadian carmakers from their countries'

tariffs for one month as long as they complied with existing

free trade rules.

That had led U.S. stocks sharply higher and shored up Asian

markets. MSCI's broadest index of Asia-Pacific shares outside

Japan was up 1.25%, while Tokyo's Nikkei

finished 0.8% higher.

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

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

highest in three years. The Hang Seng is up 20% so far this

year, by far the best performing major stock market in the

world.

ECB RESPONSE

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

now had even more of a spotlight in the wake of the mass

rearmament drive in Germany and the rest of Europe.

The euro was steady at just over $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 recent cuts but,

"Christine Lagarde will most certainly be asked about how the

ECB intends to respond," to the European-wide increase in

defence spending, Lafargue said.

In commodities, gold prices were steady at $2,921.39 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 in

previous sessions 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 hovered close to an over three-year

low touched on Wednesday.

($1 = 0.9247 euros)