GLOBAL MARKETS-Bonds rally, stocks fall as global economy fears mount
* Caution after disappointing China, U.S. inflation readings
* Oil hits fresh lows on demand fears; WTI closes in on $80
* Dollar slumps as investors reassess Fed rate outlook (Updates prices; changes comments)
By Rodrigo Campos
NEW YORK, Oct 15 (Reuters) - Stocks took a pounding on Wednesday, although Wall Street managed to peddle back from its steepest lows, and safe-haven government debt prices rose after U.S. and Chinese inflation data fanned worries about a global slowdown.
A key gauge of Wall Street anxiety hit its highest level since November 2011 as investors rushed to buy protection against further losses, and options activity surged as investors reevaluated their strategies in light of the latest signs that the global economy may be losing its footing.
The S&P 500 fell as much as 3 percent, briefly turning negative for the year, while European equities finished 3.2 percent lower and marked their biggest one-day slide in almost four years.
Popular trades that have worked for most of the year, including heavy bets on the dollar, more gains in stocks, and on an eventual rise in yields, are unraveling.
A fall in China's inflation rate to a five-year low and a decline in U.S. producer prices for the first time in over a year were worrisome signs to investors already skittish about the path of the global economy and caused them to reassess their views on when the U.S. Federal Reserve might hike interest rates. Continued...