GLOBAL MARKETS-Bond market selloff extends after seismic German spending shift

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 DE10YT=RR 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 EUR=EBS while European stocks .STOXX.FTEU3 also took a breather after a 10% rally this year. .EU

"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 US10YT=RR rose for a third day too despite rising bets on more Federal Reserve rate cuts. JP/

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 .MIAPJ0000PUS was up 1.25%, while Tokyo's Nikkei .N225 finished 0.8% higher.

China's blue-chip index .CSI300 rose 1.4% while Hong Kong's Hang Seng Index .HIS 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. .SS

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 EUR=EBs 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. GOL/

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 LCOc1 hovered close to an over three-year low touched on Wednesday. O/R

($1 = 0.9247 euros)