Shares lose to bonds as deflation danger dominates

Disappointing manufacturing surveys from China and the UK combined with downgrades to growth and inflation forecasts from the European Commission to sour the mood.

A rate cut from the Reserve Bank of Australia (RBA), the first in a year, further underlined how the danger of deflation was spreading worldwide.

"Global yields fell sharply overnight after the RBA cut in Australia gave a low inflation signal to markets," said analysts at Australia and New Zealand bank in a note.

"Concerns include a weaker company earnings outlook for banks, utilities, and commodity-producing companies. Sluggish economic growth remains a concern too, with many central banks reaching the limits of what can be done."

In Europe, yields on German government debt recorded their biggest daily fall so far this year, with 10-year paper down 8 basis points to just below 0.20 percent.

Yields on U.S. 10-year Treasury notes fell 7 basis points to a two-week trough of 1.798 percent. They had been as high as 1.94 percent last week.

Equities were cold-shouldered in the rush to safe-haven assets and MSCI's broadest index of Asia-Pacific shares outside Japan off 0.5 percent.

South Korean stocks slipped 0.6 percent and Australia's main index 0.9 percent. Japan was again on holiday, which was just as well given the strength of the yen.

On Wall Street, the Dow had ended Tuesday down 0.78 percent, while the S&P 500 lost 0.87 percent and the Nasdaq 1.13 percent.

Even a surprisingly upbeat report on U.S auto sales failed to lift the mood, with shares of car makers falling on worries the industry's recovery was running out of steam.

The flight from risk also played out in forex markets with investors favouring currencies from economies with large current account surpluses such as Japan and the euro zone.

The yen reached an 18-month peak of 105.55 per dollar before edging back to 106.60 on Wednesday morning. It remains 12 percent higher for the year so far.

The euro got as far as $1.1616, its highest since August, before fading to $1.1504.

The U.S. dollar had better luck against commodity-linked currencies, with the Australian dollar taking a particularly hard hit after the cut in domestic interest rates.

The Aussie was down at $0.7503 after falling a whopping 2.4 percent on Tuesday. Against a basket of currencies, the U.S. dollar was a whisker firmer at 92.976.=d$>

All the talk of deflation weighed on commodity markets where gold, copper and iron ore all lost ground.

Oil prices wavered ahead of a U.S. government report due on Wednesday likely to cite record high crude stockpiles.

After falling for two sessions, prices bounced a little in early Asian trade with Brent crude quoted up 22 cents at $45.19 a barrel, while U.S. crude added 19 cents to $43.84. (Reporting by Wayne Cole; Editing by Eric Meijer)