Bonds rise, oil falls as economic gloom persists

By Lionel Laurent

LONDON (Reuters) - Persistent fears over the health of the global economic recovery kept bond yields and oil prices falling on Wednesday, even as shares broadly stabilised after days of steep losses.

Market volatility has surged in recent weeks as investors weigh the timing of expected interest rate increases, especially in the United States, against disappointing macroeconomic signals such as a worse-than-expected inflation reading from China.

The MSCI All-Country World index was trading broadly flat at 0740 GMT, having fallen some 8 percent since the end of August.

There were pockets of choppiness in Europe, with Britain's FTSE 100 benchmark stock index down more than 1.2 percent, dragged lower by a 26 percent fall in the share price of drug company Shire after U.S. rival and suitor AbbVie warned it could reconsider plans to buy Shire.

Safe-haven government bonds across the euro zone performed better, with German bund yields hitting a record low as investors sought refuge from signs of cooling economic demand.

"With deflation worries still very much at the fore of the euro area and the pressure on the ECB to take further action in coming months, bunds will remain underpinned in the near term," said Nick Stamenkovic, bond strategist at RIA Capital Markets.

Worries over the economic recovery also kept commodities under pressure: Brent crude futures fell to a new four-year low of $83.95 per barrel and U.S. crude oil fell to $80.60 per barrel, stoking fears of further falls in inflation.

"The sharp decline in the price of crude oil is serving to increase downside risks to inflation in the near-term," said Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ.

The oil price fall also spread to currency markets, where the U.S. dollar hit a five-year high against the Canadian dollar and held firm near a 11-month peak against sterling on Wednesday with investors resuming bullish bets after a recent sell-off and staying away from currencies grappling with slowing inflation.

"Clearly the correlation between oil and commodity prices on the Canadian dollar is playing out. The more oil prices fall, the more dollar/CAD will rise," said Jeremy Stretch, head of currency strategy, CIBC World Markets.

(Reporting by Lionel Laurent; Additional reporting by Jamie McGeever, Anirban Nag, Marc Jones and Marius Zaharia; Editing by Toby Chopra)