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European equities struggled to stop the rot after a rout on Tuesday, as soaring bond yields dampened any relief from a growing consensus that the damaging threat of deflation across the continent may be disappearing.
Instead, investors are not only rushing to get out of low or negative-yielding bonds, but are also questioning the rationale for holding equities in a slow growth environment as the high yields on offer relative to bonds evaporates.
Oil prices jumped to their highest this year, with Brent crude futures now up more than 50 percent from the multi-year trough plumbed as recently as January.
Even top-rated assets sank, with Germany's 10-year yield rising to a 2015 high at just under 0.6 percent. The yield has more than tripled in a week and risen 10-fold in just three weeks, erasing all the gains made this year.
Benchmark 10-year yield on Spanish, Italian and UK government bonds also hit year highs. The 10-year U.S. Treasury yield was within three basis points of a 2015 peak too.
"Another bloodbath in developed fixed income," Royal Bank of Scotland's rates strategy team wrote in a note to clients.
Spain's benchmark yield hit 1.96 percent >, Italy's 1.98 percent > and Britain's gilt yield broke through 2 percent >.
Europe's index of leading 300 stocks was flat on the day at 1,555 points, having touched a two-month low of 1,545. In choppy trading, Germany's DAX was up 0.5 percent, having also hit a two-month low earlier in the session.
Corporate earnings results and surprisingly strong data showing Spain's services sector growing at its fastest pace since 2000 helped cushion European stocks.
U.S. futures pointed to a flat open on Wall Street.
REFLATION
European markets failed to draw much comfort from Greece meeting an interest payment deadline on a 200-million-euro loan from the International Monetary Fund.
Athens is quickly running out of money and is trying to persuade euro zone partners and the IMF to extend further aid. A bigger test will be a 750-million-euro payment due on May 12.
Bonds have been among the best performing asset classes in recent years thanks to the unconventional policy easing steps taken by the world's central banks, but signs are emerging that investors are tired of chasing ever-shrinking yields.
One of the most crowded trades in equities is also showing signs of crumbling. In the six months to the end of April, Chinese stocks doubled in value. On Wednesday they fell 1.6 percent, following the previous day's 4-percent slump.
A major index of Asian shares is down 3 percent from a more than seven-year high on April 29. MSCI's broadest index of Asia-Pacific shares outside Japan fell 1 percent on Wednesday, and Australian stocks ended down 2.3 percent.
The Dow ended Tuesday down 0.79 percent, the S&P 500 lost 1.18 percent, and the Nasdaq 1.55 percent.
"If the rise in yield resulting from dumping Bunds is compounded into other G10 government bonds by possible signs of oil-driven reflation currents, then stocks will have to take notice," City Index chief markets strategist Ashraf Laidi said.
A broad bounce in commodities saw oil and copper prices rise to their highest levels so far this year.
Brent crude
In currencies, the dollar remained under pressure after data on Tuesday showed that the U.S. trade deficit widened sharply in April, suggesting the economy probably shrank in the first quarter.
The euro was the main winner, its allure brightened by the steep rise in euro zone bond yields. The common currency was up 0.5 percent at $1.1240 >.
The dollar index was down a third of one percent at 94.813, retreating from a one-week high of 95.946.
Later in the day, Federal Reserve Chair Janet Yellen is scheduled to speak and markets will be super sensitive to any guidance on the outlook for the first hike in interest rates.
