— MSCI world steadies after biggest 1-day loss in 14 months —
World stocks steadied on Wednesday after their biggest one-day plunge in over a year, with European markets bouncing on the last day of the quarter after European Central Bank funding operations eased nerves.
Fresh banking and sovereign debt stress in Europe and fears of an austerity-fuelled double-dip into recession for the world economy have gripped investors again in the final days of June.
MSCI's world equity index, which has lost more than 10% since April and is down more than 7% over the first six months of 2010, held the line after losing more than three percent on Tuesday.
The global index, which was up 0.1% in Europe on Wednesday, has recorded its worst quarter since the final three months of 2008 when the demise of Lehman Brothers sent world markets and the economy into a tailspin.
Worries this week that an expiry of some 442 bln euros of one-year emergency ECB loans would leave many strapped European banks with severe financing difficulties eased a little after a replacement 3-month operation saw less of scramble for funds than feared.
"It's definitely a good sign and means there is still some interbank lending occurring within the European money market, and that's it's not just a vertical relationship between banks and the ECB," said Gilles Moec, economist at Deutsche Bank.
The ECB said 171 banks borrowed 131.9 bln euros over three months at a flat rate of 1 percent, below expectations for demand of 210 bln euros.
"The banks are in effect swapping a comfy sofa for a stool — but at least there are plenty of stools," said Societe Generale rate strategist Suki Mann.
The FTSEurofirst 300 index of European stocks was 0.3% higher on Wednesday, up from a three-week closing low in the prior session. European banking stocks rebounded 1.5%. Safe-haven German government bond futures for September delivery retreated 0.02%.
ECB relief and slightly higher short-term interest rates due to the week's net drain of emergency funds helped push the euro sharply higher. It rallied almost one percent after two days of steep losses, gaining more than one percent on sterling.
"Any kind of sense that the ECB is in some way going to leave the market short of liquidity is obviously very far wide of the mark," said Steve Barrow, strategist at Standard Bank.
MOUNTING NERVES
Looming publication of European bank stress tests next month have added to the fresh nerves about the sector. The Bundesbank said on Wednesday that German banks have agreed to participate in EU-wide stress tests once detailed parameters are published.
"A confluence of events may well cause market anxiety to culminate today, potentially causing risk aversion to mark at least a local peak," said Commerzbank rate strategist Christoph Rieger, adding that Bund option expiries, month-end portfolio adjustments and U.S. employment data were also likely to weigh.
U.S. June private-sector employment data from ADP is due out later in the session and the benchmark non-farm payrolls report is due on Friday. U.S. stock futures pointed to a higher open on Wall Street later.
Alongside European banking and sovereign debt jitters and the calendar stresses of the half-year mark, investors are increasingly fearful for global economic growth after a series of downbeat reports from the United States and China.
"Markets are very sensitive to any signs that growth is failing. There have been question marks over the big components of global growth such as U.S. consumer demand and Chinese demand … (and) there isn't a lot of good news," said Bernard McAlinden, investment strategist at NCB Stockbrokers in Dublin.
Risk reduction was fuelled by a report that showed a slump in U.S. consumer confidence.
Chinese stocks fell 1.2%, extending a 4% slide on Tuesday to a new 14-month low. Emerging stocks dropped another 0.5% on Wednesday after almost three percent losses on Tuesday.
Earlier, the MSCI index of Asia Pacific shares outside Japan dropped another 0.5%. Japan's Nikkei average fell 2% to a seven-month low after breaking below a support level.
