Stocks sell off as U.S. data sparks worry and yields plunge

NEW YORK/LONDON (Reuters) -- Global equities dropped on Thursday, with Wall Street's major indexes selling off as U.S. data sparked economic worries about and financial stocks in Europe saw their biggest one-day rout since March 2023.

Treasury yields plunged following the weak data, with the U.S. two-year to 10-year note yields dropping to six-month lows, below 4%.

Oil futures finished lower as global supply seemed largely unaffected by worries of a broadening Middle East crisis.

The Federal Reserve held interest rates steady on Wednesday but opened the door to a cut in September. The Bank of England stole a march on the U.S. central bank on Thursday by lowering borrowing costs by a quarter-point in a narrow 5-4 vote.

The U.S. Institute for Supply Management's (ISM) manufacturing PMI dropped to its lowest since November, below a key level that indicates contraction in a sector that accounts for more than 10% of the economy.

The number of Americans filing new applications for unemployment benefits increased to an 11-month high last week, suggesting some softening in the labor market, although seasonal factors also played a role, other data showed.

"Today's sell-off isn't about earnings. It's about whether the Fed sees what the data is saying," said Quincy Krosby, chief global strategist for LPL Financial in Charlotte, North Carolina.

"If tomorrow's payroll report sees the unemployment rate rising despite an increase in the participation rate, the Fed is going to have a lot of explaining to do," Krosby added. 

On Wall Street, the Dow Jones Industrial Average fell 494.82 points, or 1.21%, to 40,347.97, the S&P 500 lost 75.62 points, or 1.37%, to 5,446.68 and the Nasdaq composite lost 405.25 points, or 2.30%, to 17,194.15

MSCI's