* MSCI world stocks index sees biggest fall in 5-weeks
* Europe falls 2.5%, Asia stocks retreat after 10 days of
gains
* Fed cautious on economy, ready to take further action
* Bonds rally as Fed mulls yield curve control, guidance
* Dollar comes off three-month lows as risk appetite wanes
By Marc Jones and Wayne Cole
LONDON/SYDNEY, June 11 (Reuters) - World shares took their
biggest tumble in five weeks on Thursday as a sobering outlook
from the U.S. Federal Reserve challenged market optimism on the
global economy, while bonds rallied on bets yet more stimulus
would be needed to ensure recovery.
Asia saw a 10-day winning streak come to an abrupt finish
.T and Europe's main bourses all opened with a heavy thud.
.EU
London's FTSE .FTSE , Frankfurt's DAX .GDAXI and Paris's
CAC40 .FCHI were all down more than 2.5% in what for
coronavirus-sensitive sectors such as carmakers .SXAP and
travel and tourism .SXTP was a fourth straight day of drops.
.EU
MSCI's 49-country index of world stocks .MIWD00000PUS
slid 0.75% in its largest daily loss in five weeks, while E-Mini
futures for the S&P 500 ESc1 fell 1.5% to extend the previous
session's pullback on Wall Street. .N
In a reality check to the stock market's recent euphoria,
the Fed predicted the U.S. economy would shrink 6.5% in 2020 and
unemployment would still be at 9.3% at year's end. Data had also shown core U.S. consumer prices fell for a
third straight month in May, the longest stretch of declines on
record. As a result, Fed Chair Jerome Powell said he was "not even
thinking about thinking about raising rates". Instead, he
emphasised recovery would be a long road and that policy would
have to be proactive with rates near zero out to 2022.
"While Powell did not commit to any new action at this time,
his focus on downside risk and uncertainty reinforces the
message that they will take further action, probably by
September," JPMorgan economists said.
"Outcome or calendar-based guidance looks likely and Powell
left the door open for moving to some form of interest rate
caps."
Powell confirmed the Fed was studying yield curve control, a
form of easing already employed by Japan and Australia.
All of which saw yields on 10-year Treasuries US10YT=RR
fall 9 basis points on Wednesday, the biggest daily drop in
almost two months. Yields were down at 0.71% on Thursday, a
sharp rally from last week's peak of 0.96%. US/
German Bund yields - the benchmark for Europe - duly
followed. Their 10-year levels fell to an eight-day low in early
trade at -0.37%, falling 4 basis points on the day DE10YT=RR .
The risk of more Fed easing initially had the U.S. dollar
under pressure, seeing it touch a three-month low against a
basket of currencies at 95.714 =USD .
But it then staged a rebound back towards 96.500 as risk
appetite waned and stocks came off.
Market sentiment also took a hit as new coronavirus
infections in the United States showed a slight increase after
five weeks of declines, only part of which was attributed to
more testing. Eric Toner, a senior scholar at the Johns Hopkins Center for
Health Security said that "There is a new wave coming in parts
of the country. It's small and it's distant so far, but its
coming."
The dollar was last at 107.20 yen JPY= , after hitting a
one-month trough at 106.87. The euro edged back to $1.1360
EUR= , having hit its highest since mid-March on Wednesday at
$1.1422.
The prospect of super-low rates for longer had been a boon
for gold overnight, but it too had run into selling in Asia,
slipping to $1,728 an ounce XAU= . GOL/
Oil prices also turned lower amid renewed concerns about
demand and after U.S. data showed crude inventories had risen to
record highs. O/R
Brent crude LCOc1 futures fell $1.56 or 3.7% to $40.15 a
barrel, while U.S. crude CLc1 lost $1.57 to $38.03.
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