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By Dave Morris

Investors ran to the safety of government bonds on Wednesday, sending European markets into a tailspin.

How did markets perform?

The Stoxx 600 fell 1.5% to 370.3, after closing down 0.2% Tuesday.

The U.K.'s FTSE 100 declined 1.4% to 7,166.8 following a nearly flat close Tuesday.

The pound shrank 0.2% to $1.2636 after ending Tuesday essentially flat.

In Germany, the DAX (DAX) dipped 1.4% to 11,857.1. It sank 0.4% Tuesday.

France's CAC 40 was 1.8% lower at 5,215.4, which had also retreated 0.4% Tuesday,

Italy's FTSE MIB was down sharply to 19,933.2, a 1.6% fall. It was 0.5% lower Tuesday.

What's moving the markets?

Bond yields on U.S. Treasurys and other safe assets are swooning as investors positioned themselves for the potential of worsening economic conditions. The U.S. 10 year bond's yield fell to its lowest level in nearly two years, falling three basis points to 2.23%. The move has been viewed as a flight to quality assets in preparation for a possible downturn, but as Ian Williams, economics and strategy research analyst for Peel Hunt argues, macroeconomic data has turned broadly positive. In the Eurozone, economic sentiment index improved to 105.1 in May from 104 in April, strong household and corporate lending growth was also bullish. In the U.S., Williams writes, consumer confidence was higher in May at 134.1 than in April (129.2) and the labor market remains competitive.

"After weakening during Q1, the labor market readings reflected the recent hard data suggesting continued tightness in the market, with a growing proportion of respondents suggesting that jobs are plentiful and expecting that availability to improve further."

Italy's sovereign bond yields eased slightly from the open, edging down nearly a basis point as right-wing anti-European Deputy Prime Minister Matteo Salvini geared up for a fight with the European Commission over budgets. Italy's 10-year bond yielded 2.64%, one of the few sovereign 10-years to see rising yields in recent days, suggesting investors don't consider Italy's government debt as safe as others.

In economic data, German unemployment unexpectedly increased in May to 5%, up from April's figure of 4.9% and consensus expectations that it would remain unchanged. France's gross domestic product (GDP) for the first quarter arrived in line with expectations at 0.3%. Inflation disappointed, however, with Consumer Price Inflation (CPI) for May, not seasonally adjusted, came in 0.2% higher month over month, versus 0.3% consensus. Consumer Spending in April beat the consensus with a 0.8% gain, versus analysts' expectations of 0.4%.

Which stocks are active?

Shares in auto maker Renault SA (RNO.FR) continued to rise as investors digested the implications of Saturday's news that it was in merger talks with Fiat Chrysler Automobiles NV (FCA.MI). Analysts largely welcomed the news, citing the prospect of cost savings from the combination. Renault's share price rose a further 0.4% on Wednesday.

The contest to replace outgoing U.K. Prime Minister Theresa May as Conservative party leader is under way, and the political uncertainty has drawn fresh attention to the opposition Labour Party's plans to nationalize energy and water utilities. The market appears to be discounting a report in the Financial Times Wednesday (https://www.ft.com/content/2ec4e042-7e30-11e9-81d2-f785092ab560?FTCamp=engage/CAPI/webapp/Channel_FACTSET//B2B) that investors are up in arms over Labour's plan to compensate shareholders below market value for utilities. Shares in United Utilities Group PLC(UU.LN) and Severn Trent PLC (SVT.LN) are both up 0.9%. Energy utility National Grid PLC (NG.LN) is also 0.5% higher, though it has not yet reclaimed the heights seen before its full-year earnings May 16.

One of Europe's largest steelmakers, ArcelorMittal SA(MT.FR), said it would lower primary production at sites in Dunkirk, France and Eisenhuettenstadt, Germany and reduce production at its site in Bremen, Germany in the fourth quarter. The company blamed market weakness for the reduction. Shares traded 4.3% lower on Wednesday.

Provident Financial PLC (PFG.LN) shares were down nearly 2% on news that regulators were weighing whether to investigate a planned hostile takeover of the subprime home lender by Non-Standard Finance PLC (NSF.LN). The Competition and Markets Authority will decide by July 23 whether to move forward with a probe.

(END) Dow Jones Newswires

May 29, 2019 06:14 ET (10:14 GMT)

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