* 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
* Oil tumbles towards first weekly fall since April
* Dollar comes off three-month lows as risk appetite wanes
* World FX rates in 2020 tmsnrt.rs/2egbfVh
By Marc Jones
LONDON, June 11 (Reuters) - World shares took their biggest tumble in five weeks on Thursday as a sobering economic outlook from the U.S. Federal Reserve challenged market expectations, 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 fell with a thud as the selling gathered pace.
London’s FTSE, Frankfurt’s DAX and Paris’s CAC40 were all down more than 2% and coronavirus-sensitive sectors such as carmakers and travel and tourism saw a fourth straight day of declines.
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%, extending 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 also showed 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.
“The Fed is still rightly concerned about the massive shock to employment, inflation and growth prospects,” said BlackRock’s Chief Investment Officer of Global Fixed Income, Rick Rieder.
“The central bank has committed to keeping policy rates low for a very long period and continuing QE ‘at least at the current pace’. This strikes us as an appropriate policy mix,” he said, adding that a longer-term vow to keep rates down might come soon.
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 0.70% 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 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. That pinned the euro and the pound down, but absolutely clattered the Mexican peso and South African rand in emerging markets.
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 “There is a new wave coming in parts of the country. It’s small and it’s distant so far, but it’s coming.”
The dollar was last at 107.08 yen, after hitting a one-month trough at 106.87. The euro edged back to $1.1355 , 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 and had slipped to $1,726 an ounce ahead of U.S. trading.
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 as both headed for their first weekly drop since April.
Reporting by Marc Jones; Editing by Alex Richardson and Susan Fenton