Stocks, Dollar Swept Lower As Bond Rout Rocks Markets

(Reuters) - World financial markets were unsettled again on Thursday as a week-long sell-off in benchmark government bonds, stocks and the dollar and a race up in oil prices showed little sign of relenting.

Nerves were still jangling in Europe and shares and bonds got off to another poor start on fears the recent surge in yields, the euro and energy costs could snuff out the only recently-formed hopes of a solid euro zone recovery.

The regional FTSEurofirst was led down by 1.2 and 1.8 percent falls on Germany's Dax and France's CAC 40 and as the euro hit its highest level against the dollar and other top currencies since February.

"Their has been a massive repositioning over the last 10 days and it is still ongoing," said Philippe Gudin de Vallerin, head of euro research at Barclays in Paris.

"Some sales people say there has been massive selling from Asia, but from a fundamental point of view the move has certainly been excessive. It is difficult understand."

London's FTSE, the region's biggest share market, meanwhile, was down 1.4 percent, with attention also on the day's national election which remains too close to call.

Sterling was a fraction lower at $1.5234. Markets have barely budged during campaigning but the outcome will be anything but dull.

Britain’s ability to hold on to Scotland and its place in the European Union are both potentially up for grabs depending on which party, or more likely parties, prevail.

"In many ways the process doesn’t really start until we know the result and whether we have a ‘working’ government," said Nick Lawson, a managing director at Deutsche Bank in London.

BUND AID

UK gilt yields nudged higher like most global bond markets, but focus was more on the euro zone as most of government borrowing costs hit 2015 highs and worries about Greece's future in the euro lurked.

German 10-year bond yields jumped to 0.770 percent as selling gathered pace again. Just a month ago they were at a record low of 0.05 percent and many were betting the European Central Bank's trillion euro bond buying plan would turn them negative.

Economic data from France and Germany released as markets opened also added to the uncertainty. German industrial orders figures rose less than expected with the country's economy ministry pointing to weak foreign demand.

More evidence of the bond market rout came as eastern Europe's biggest economy Poland canceled a debt auction and the country's deputy finance minister warned it may not restart them for a few months.

The reason for the turnaround in sentiment hasn't yet been pinpointed although with oil back near $70 a barrel fuelling talk of a rebound in inflation - Brent was at $68.25 at 1000 GMT (5 a.m. ET) - some analysts argue the ECB is now more likely to end its QE early, rather than extend it as previously suspected.

DOLLAR DIVE

The dollar has been one of the other startling movers in recent weeks. It languished at its lowest in over two months against a basket of major currencies having come under renewed pressure from disappointing data on Wednesday.

It was down a fraction against the yen at 119.37 and weaker again against the euro at $1.1383 per euro. Ten-year U.S. Treasuries which have been moving in the same direction as the currency also saw their yields climb to 2.28 percent.

Friday sees the release of monthly U.S. jobs data that are seen as the best gauge of the giant economy's health. It is also crucial for the Federal Reserve and its chair, Janet Yellen, warned on Wednesday there could be disruption ahead.

"We could see a sharp jump in long-term rates. So we’re trying to ... communicate as clearly (as possible) about our monetary policy so we don’t take markets by surprise," she said.

Like Europe's bourses, Wall Street's main S&P 500 and Dow Jones and Nasdaq indexes looked set to extend their falls into a third straight day.

Asia had seen fresh selling overnight too. MSCI's broadest index of Asia-Pacific shares outside Japan fell 1 percent as shares retreated in China, Hong Kong, Australia, South Korean and Malaysia.

The Shanghai Composite Index was down 1.4 percent on fears of fresh moves by regulators to reduce leverage in stock trading, extending its losses so far this week to 6.1 percent, while Tokyo's Nikkei lost 1.1 percent.

Among commodities, profit taking saw oil drift off its 2015 high and copper and most other industrial metals also retreated from recent peaks as traders locked in some gains.

"Certainly this decline in the dollar index from the recent highs is shaping a lot of price activity across the commodity complex," said analyst Mark Keenan of Societe Generale.