June 11, 2020 / 8:17 AM / 21 days ago

GLOBAL MARKETS-Stocks spooked, bonds rally on downbeat Fed

* 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 and Europe's main bourses all opened with a heavy thud.

London's FTSE, Frankfurt's DAX and Paris's CAC40 were all down more than 2.5% in what for coronavirus-sensitive sectors such as carmakers and travel and tourism was a fourth straight day of drops.

MSCI's 49-country index of world stocks slid 0.75% in its largest daily loss in five weeks, while E-Mini futures for the S&P 500 fell 1.5% to extend the previous session's pullback on Wall Street.

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 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%.

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.

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.

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, after hitting a one-month trough at 106.87. The euro edged back to $1.1360 , 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.

Oil prices also turned lower amid renewed concerns about demand and after U.S. data showed crude inventories had risen to record highs.

Brent crude futures fell $1.56 or 3.7% to $40.15 a barrel, while U.S. crude lost $1.57 to $38.03.

Reporting by Marc Jones; Editing by Alex Richardson

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