US and European stocks staged a tentative rebound yesterday following the previous session's sharp sell-off, although the underlying mood remained cautious as investors re-evaluated the outlook for risk.
The optimism about the global economy that has buoyed equities, credit and commodities over the past few weeks was dented on Wednesday by a weak set of US retail sales figures.
"The recent upturn in data is beginning to show signs of crumbling," said Rob Carnell, economist at ING.
Julian Jessop at Capital Economics said that while the recent bounce in equities seemed justified by improvements in some business surveys and a steadying in consumer confidence, further large gains would require a "V-shaped" economic recovery.
"While that scenario is not completely unrealistic in some countries, including the US and Japan, it is much more likely that the recovery falters as the temporary factors that have contributed to the rebound start to fade or actually go into reverse," Mr Jessop said.
"Even if the green shoots do flourish in the coming months, we might only see one or two quarters of decent growth this year or early in 2010 before disappointment sets in again."
Themos Fiotakis, strategist at Goldman Sachs, said the US consumer would remain on the sidelines for a while as the household savings ratio built up, but added: "The data are likely to continue to signal the transition from a very negative growth environment to a regime of sluggish growth - thus maintaining a broadly positive undertone for cyclical risk."
Encouraging signs continued to come from the money markets yesterday, as policymakers' efforts to thaw frozen credit markets continued to show signs of -working.
The three-month London dollar interbank offered rate fell 2.9 basis points, the most in eight weeks, to a fresh record low of 0.85 per cent. The spread between Libor and Overnight Index Swaps, an indicator of the willingness of banks to lend to each other, narrowed to 66bp, the lowest since last June.
Credit spreads , which have tightened sharply over the last two months, saw a further moderate tightening. The Markit iTraxx Crossover index of mostly junk-rated credits was down 6bp at 804bp.
Further positives came from news that the Baltic Dry index of freight costs - seen by many as key indicator of the health of the global economy - had hit its highest level this year, and by a fresh decline in the Vix volatility index - also known as Wall Street's "fear gauge".
US equities settled onto an upward path after a hesitant start, as defensive sectors were boosted by economic uncertainty. By the close in New York, the S&P 500 was up 1 per cent, while the pan-European FTSE Eurofirst 300 index rose 0.5 per cent.
Asian markets suffered broad losses, however, as investors took their lead from Wednesday's hefty sell-off on Wall Street. In Tokyo, the Nikkei 225 Average fell 2.6 per cent, Hong Kong shed 3 per cent and Australian stocks fell 3.4 per cent.
Government bond yields failed to benefit from the rally in US and European stocks. The yield on the 10-year German Bund fell 5bp to 3.30 per cent while the two-year Schatz yield slipped 3bp to 1.26 per cent, off a six-week low of 1.24 per cent struck earlier.
The 10-year gilt yield fell 2bp to 3.48 per cent - putting it on track for its biggest weekly fall since March, when the Bank of England announced its quantitative easing programme.
On Wednesday, the Bank delivered a cautious outlook on the UK economy in its quarterly Inflation Report.
The 10-year US Treasury yield was 3 basis points lower at 3.09 per cent as investors shrugged off news of a rise in initial jobless claims last week.
But on the currency markets , the data offered some support to the dollar as it continued to benefit from haven buying from investors nervous about the global outlook. The greenback hit a one-week high against the euro before falling back, and also gained ground against the yen and the Swiss franc.
Oil dominated trading in commodity markets after the International Energy Agency predicted global consumption this year would fall by the most since 1981.
Benchmark US crude dipped 88 cents to $57.24 a barrel, having briefly broken above $60 earlier this week. Gold inched higher.
