By Koh Gui Qing and Amanda Cooper
NEW YORK/LONDON (Reuters) -World stocks and commodities slid on Tuesday as investors turned uneasy about evidence that the U.S. economy's "exceptionalism" may be starting to unwind, after data showed surprising weakness in business activity.
The risk that the U.S. economy might be softening more than expected was brought to the fore again after Tuesday's data showed job openings fell more than forecast in April to the lowest in more than three years.
That helped to reinforce some investor speculation that the Federal Reserve could be on track to lower interest rates this year as a cooling economy tempers inflation pressures. In response, Treasury yields briefly extended their declines early in the session, before recovering somewhat.
"Markets are back to thinking two rate cuts is the likeliest path of Fed rate policy over the rest of the year," said Nicholas Colas, the co-founder of DataTrek Research. "The past week's softer-than-expected economic data explains the rethink."
By the end of the session in New York, the MSCI All-World index was down 0.2%. On Wall Street, major stock indices reversed losses to eke out modest gains. The S&P 500 index added 0.2%, the Dow Jones Industrial Average rose 0.4% and the Nasdaq Composite was up 0.2%.
Several measures of volatility picked up, reflecting a degree of nervousness among traders, while classic safe-haven assets like bonds and the dollar remained in positive territory.
Oil, copper and gold also fell in the face of the stronger U.S. currency.
Earlier in the day, the dollar touched its lowest in over two months against the euro and the pound, as investors have bought into the idea that the U.S. economy is slowing enough to warrant rate cuts this year.
"It is understandable why the market behaved as it did in the first quarter, but if one looked at broader indicators, there have always been certain signs that maybe the story isn't quite as strong as might have been expected," Daiwa Capital economist Chris Scicluna said.
"Most people would have assumed that where the fed funds rate is right now is in restrictive territory. That is bearing down on underlying inflation and bearing down on some of the dynamism in spending," he said.
Stocks in Europe slid, led by energy, mining and banking shares, pushing the STOXX 600 down by as much as 0.9%. It trimmed losses and to finish down 0.5%.
Wall Street's so-called "fear index," the VIX rose by the most in a week, echoing a sharp rise in the Euro STOXX volatility index to a one-month high.
In India, share markets sold off sharply after early vote counting showed Prime Minister Narendra Modi's Bharatiya Janata Party (BJP)-led alliance was not headed for a landslide win as predicted.
A Modi victory had been expected to be positive for the country's financial markets, according to analysts, on the hope India will undertake further economic reform.
The reduced prospect of Modi's alliance winning an overwhelming majority rattled investors.
The Nifty index dropped as much as 8.6% before recovering some of those losses, while the BSE index dropped almost 6%. Both indexes had touched all-time highs on Monday.
Political jitters also knocked the Mexican peso and South Africa's rand. Both currencies fell about 1.1%, following election results in those countries.
JOBS, JOBS, JOBS
This week brings a slew of major data. Non-farm payroll figures for May are out on Friday, following Tuesday's Job Openings and Labor Turnover Survey.
On Monday, U.S. Treasury yields fell to the lowest point in two weeks, after the country's manufacturing activity slipped for the second consecutive month in May.
Benchmark 10-year note yields fell 7 basis points to 4.332% and got as low as 4.314%, the lowest since May 16. Two-year note yields fell 5 basis points to 4.773% and reached 4.749%, also the lowest since May 16.
"The sharper move at the long-end is a sign that weaker manufacturing data is unlikely to shift the dial on Fed rate cuts near term, but is perhaps a signal of the market's view of neutral interest rates as U.S. economic exceptionalism fades," Westpac economist Jameson Coombs said in a note.
In Europe, investors expect the European Central Bank on Thursday to cut the benchmark rate by 25 basis points to 3.75%.
The dollar fell 1% against the yen, viewed by many as a safe-haven asset because of the low interest rate it bears, to 154.71, around its lowest for two weeks and over 3% down from late April's multi-year high at 160.03.
The euro fell 0.2% to $1.08795, while sterling slipped 0.3% to $1.2769. The dollar index, which tracks the greenback against a basket of currencies of other major trading partners, was up 0.1% on the day at 104.15.
U.S. crude oil fell 1.2% to $73.33 a barrel. Brent crude also fell 1% to $77.56. Both benchmarks hit four-month lows on Monday after the Organization of the Petroleum Exporting Countries and allies, together known as OPEC+, agreed to start unwinding some production cuts from October.
Gold dropped 1% to $2,326.98 an ounce, while copper, which hit record-highs last month, rose 1.5% to $10,193 a tonne.