US data, Fed caution keep pressure on world stocks, dollar

Europe's FTSEurofirst 300 down 0.8%, heads for worst week of the year

World stock markets and the dollar remained in a sharp sell-off mode on Thursday, having been jolted sharply lower by weak US growth data and cautious comments from the Federal Reserve.

Asian and European stocks continued a two-day decline for equity markets worldwide with Europe's FTSEurofirst 300 down 0.8% and heading for its worst week of the year.

The slide of more than 3.5% is being compounded by this week's jump in bond yields and a more than 2% surge in the euro to above $1.12, all of which are threatening to extinguish hopes for the region's recovery prospects.

Benchmark German Bund yields kept on climbing, having posted their biggest daily rise in two years on Wednesday on robust German inflation and a pick-up in ECB bank lending figures. Euro zone inflation data is due out at 0900 GMT.

Jefferies' global equity strategist Sean Darby said markets were now having to readjust fast to the changing fortunes of the US and Europe.

"The US, the US dollar and the US economy were very heavily consensus trades at the end of last year," he said.

"Trades around that, for example weak oil price, strong dollar, weak euro, have also been very consensus over the last couple months. That easy money has probably played itself out... There is a bit more unwinding to go."

The disappointing news on the world's biggest economy comes on top of a worrying slowdown in China and persistent fears about Europe as Greece scrambles to avoid bankruptcy.

The Federal Reserve said on Wednesday that the dip in the US economy was probably due to "transitory" factors. But, combined with concerns about the labour market, traders all but crossed June to September from the list of possible start dates for Fed rate rises.

Central banks and the cheap money they are pumping into the world's still-wobbly economy remains the underlying theme for markets.

New Zealand's central bank became the latest to say it could cut interest rates if domestic momentum weakened.

Russia was also expected to cut rates by at least 100 basis points later, having had to jack them up last year following the slump in oil prices and the Ukraine crisis.

"We scaled down our expectations for a rate cut from 200-300 bps to 100-150 bps due to comments by CBR officials which showed a reluctance to fight against the recent strengthening of the rouble," Credit Suisse economist Alexey Pogorelov said.

OIL SURGE

Europe's slide mirrored overnight moves in Asia. MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.1% as South Korean, Australian, Chinese and Hong Kong shares all suffered losses.

Japan's Nikkei slumped 2.6%, extending losses after the Bank of Japan kept monetary policy unchanged. The decision was expected but disappointed some participants who had bet it may ramp up its already massive stimulus measures.

"Risk has been building in the markets for weeks - the mass stock market trading account openings in China, the rally in Europe as the ECB ploughs on with its 65 billion euro a month QE programme," IG market strategist Evan Lucas said.

The dollar was last down 0.2% at 118.80 yen having recovered some ground but the dollar index was still being pushed lower as the euro muscled up to $1.1248.

The New Zealand dollar also sank 0.8% to $0.7617 and in turn nudged the Australian dollar down 0.1% to $0.7997 after it hit a three-month peak of $0.8077 against the greenback.

In commodities, oil prices were back on the front foot.

US crude was up 1% in London at a near four-month high of $59.20 with Brent up 0.2% at $65.99. Brent has now risen almost 50% since hitting a low of $45 in January.

The rise is another factor weighing on economic growth hopes.