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GLOBAL MARKETS-COVID-19 surge sparks bond rally, stocks on worst run in 18 months

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* U.S. indexes drop more than 1% in early trading 

  * Dollar rises broadly 

  * Oil prices fall 5% after OPEC+ resolves spat 

  * Government bond yields burrow lower amid COVID angst 

  By Jessica DiNapoli 

  NEW YORK, July 19 (Reuters) - Investors moved away from risky assets on Monday as a rise in worldwide coronavirus cases crushed bond yields and left stocks facing losing streaks, with Wall Street falling more than 1%. 

  New COVID-19 cases rose in England and Asia, with U.S. infections soaring 70% last week, dampening optimism on the economic recovery. The 10-year yield fell 8.7 basis points to 1.212%, a low last seen in February, while the S&P 500 fell for a third straight session. 

  "Investors shed risk assets in early morning trading amid fears of a surge in COVID infections that have the potential to curtail global growth," said Peter Essele, head of investment management for Commonwealth Financial Network, in an e-mailed statement. "The risk aversion was most pronounced in the 10-year Treasury yield, which fell to its lowest level since the early days of 2021. 

  "Fear of stagflation will be a major concern for investors if a resurgence in COVID infections causes economies to slow while consumer prices continue an upward trajectory," Essele said. 

  The Dow Jones Industrial Average dropped more than 2% mid-morning on Monday, with the S&P 500 falling 1.5%. The Nasdaq Composite fell nearly 1%. 

  MSCI's all-country world index, a gauge of global shares, was down 1.71%. 

  In a sign of the continued implications of the pandemic, Britain's "freedom day," ending over a year of COVID-19 lockdown restrictions in England, was marred on Monday by surging infections, warnings of supermarket shortages and British Prime Minister Boris Johnson's own forced self-isolation. Britain's fully vaccinated health minister also contracted the virus. 

  U.S. deaths from the coronavirus, spurred by the dominant Delta variant, are up 26%, with outbreaks occurring in parts of the country with low vaccination rates. About one in five new cases are in Florida. 

  "The big concern for the market is whether we are going to see a slowdown in the global economic recovery, and this could be the overriding force which results in a bad period for equities in the weeks ahead," said Russ Mould, investment director at brokerage AJ Bell. 

  On Wall Street, value stocks, including financials, industrials, materials and energy dropped between 2.1% and 4.2%. 

  Europe's STOXX 600 slid over 2% in its worst session in seven months. London's FTSE fell a similar amount to the lowest since mid-May. 

  Markets were fretting over whether broader lockdowns might be needed again and a slowdown in China, the world's No. 2 economy, meaning a recent surge in commodity prices could be peaking. 

  Natwest's Global Head of Desk Strategy John Briggs said rising COVID-19 cases would focus markets on which countries had the highest vaccination rates, their appetite for social restrictions and their fiscal appetite. 

  "The U.S. comes out on top of all these," Briggs added. "We are in a period of renewed U.S. exceptionalism... So all this is bullish for the USD." 

  The greenback climbed to a more than three-month peak against a basket of major currencies. 

  FOREVER CHANGED? 

  Oil prices, however, fell 5% as OPEC+ agreed to boost output, causing concerns about a crude surplus. The decline was the largest since late March. 

  Brent crude was down $3.61, or 4.9%, at $69.68 a barrel. U.S. oil was down $3.75, or 5.2%, at $68.06 a barrel. 

  Investors are also worried about the specter of elevated inflation, which the market has long feared. 

  Economists at Bank of America downgraded their forecast for U.S. economic growth this year to 6.5%, from 7% previously. 

  "Despite rising vaccination rates, a return to pre-Corona normality seems questionable," Ulrich Leuchtmann, head of FX and commodity research at Commerzbank, wrote in a research note. 

  (Reporting by Jessica DiNapoli in New York; additional reporting by Marc Jones and Karin Strohecker; Editing by Edmund Blair, Timothy Heritage and Dan Grebler)