(Updates prices, adds Treasuries action)
Stocks slide resumes as recession fears resume
Dollar ticks up to hold 20-year high
Pressure back on UK bonds, pound after brief BoE respite
China says stabilising currency top priority
By Lawrence Delevingne
Sept 29 (Reuters) - Investors began another cycle of selling on Thursday as the dollar added to its stranglehold on currency markets, recession fears sapped stocks and bonds suffered more interest rate pain.
After a partial rebound on Wednesday, U.S. stocks fell sharply on Thursday morning. The Dow Jones Industrial Average fell 580.6 points, or 1.96%, to 29,103.14; the S&P 500 lost 94.48 points, or 2.54%, to 3,624.56; and the Nasdaq Composite dropped 366.14 points, or 3.31%, to 10,685.50.
Europe's morning was also rough. The STOXX 600 share index was down 2.3%, with the euro and the pound , hammered over the last week by UK debt concerns, remaking only partial ground, last up 0.1% and 0.7%, respectively.
China currency intervention talk was gathering momentum too while Europe's government bond markets were braced for the highest German inflation reading since the 1950s.
Gilt selling had also resumed a day after the Bank of England had dramatically intervened to try and quell the storm surrounding the UK government's new spending plans.
"The market wouldn't mind some stability, it has become a little bit unpredictable," said Barings Investment Institute's Chief European strategist, Agnes Belaisch.
She said investors were now seeing "incoherence" in the UK with government spending as the Bank of England tries to rein in inflation, while everywhere else the focus is on how high central banks are prepared to go with interest rates.
Germany's 10-year government bond yield, the benchmark of the euro zone, jumped as high as 2.29%, as numbers from North Rhine-Westphalia pointed to a double-digit inflation figure for the country as a whole.
The UK 10-year gilt yield, which drives UK borrowing costs, rose about 12 basis points (bps) to 4.13% after falling almost 50 bps the day before due to the BoE's sudden intervention, although the 30-year yield being targeted by the central bank was little changed at 3.96%.
UK Prime Minister Liz Truss defended her new economic programme that has sent sterling to a record low this week and left the UK's borrowing costs close to Greece's - saying it was designed to tackle the difficult situation Britain was now in.
"We are facing difficult economic times," Truss, who only took over as UK prime minister this month, said on local BBC radio. "I don't deny this. This is a global problem. But what is absolutely right is the UK government has stepped in and acted."
GETTING INFLATION IN CHECK
Zooming back out, it was still about the dollar which has crushed currencies virtually everywhere this year, as well as the impact of Russia's invasion of Ukraine.
Speaking with reporters in London on Wednesday, veteran Federal Reserve policymaker Charles Evans gave no indication that any of the recent foreign exchange and bond market drama would blow the U.S. central bank off its rate hike course.
"We just really need to get inflation in check," Evans said, backing lifting the Fed's rates - now at 3% to 3.25% - to a range of 4.5% to 4.75% by the end of the year or March.
The yield on 10-year Treasury notes was up 7.6 bps to 3.784%; 30-year Treasuries rose 4.6 bps to 3.727%.
Federal Reserve Bank of Cleveland President Loretta Mester echoed that on Thursday, saying she didn't see distress in U.S. financial markets that would alter the Fed's campaign.
Thursday's currency moves saw the U.S. dollar index, which measures the currency against its peers, hang around its recent 20-year high again having had its worst session in 2-1/2 years on Wednesday.
"Despite substantial appreciation year-to-date, we see little pressure for policymakers to respond to dollar strength for now," Morgan Stanley strategists wrote in a note released Thursday.
"Trade-weighted dollar strength is not excessive, in sync with broadly tighter financial conditions and in line with Fed objectives, though inflation benefits are small."
Overnight, China's yuan had fallen again too, although it stayed just off recent post-financial crisis lows, as China's central bank said stabilising the foreign exchange market was its top priority and on reports of potential FX intervention too.
MSCI's broadest index of Asia-Pacific shares outside Japan ended the day virtually flat, although Japan's Nikkei did manage a near 1% rise.
Weekly jobless claims data bucked expectations with an unexpected fall showing how tight the U.S. labour market remains. U.S. GDP fell at an unrevised 0.6% annualised rate last quarter, the government said in its third estimate of GDP. The economy contracted at a 1.6% rate in the first quarter.
Recession angst combined with supply issues and the strong dollar meant oil prices seesawed after gaining more than $3 in the prior session.
Goldman Sachs cut its 2023 oil price forecast this week, citing expectations of weaker demand and a stronger U.S. dollar, but said global supply issues reinforced its long-term view that prices could rise again.
Oil prices fell again on Thursday, weighed on by the stronger dollar and weak economic outlook, even as OPEC+ have begun discussions about an oil output cut.
U.S. crude fell 0.9% to $81.41 per barrel and Brent was at $88.62, down 0.78% on the day.
The strong dollar also helped pushed gold prices down on Thursday, with looming rate hikes also a headwind. Spot gold dropped 0.7% to $1,648.19 an ounce. U.S. gold futures fell 0.91% to $1,645.20 an ounce.
(Reporting by Lawrence Delevingne in Boston and Marc Jones in London; Editing by Andrew Heavens and Jonathan Oatis)