Stocks and euro rebound but economic woes linger

London: The selloff in global stocks lost steam yesterday and the euro erased losses as investors took Ireland's ratings downgrade in their stride, but worries about the pace of US economic recovery kept markets cautious.

After a steep fall last Friday, Wall Street looked set to open higher with US stock index futures all trading up between 0.3 to 0.6 per cent ahead of earnings results from companies including IBM.

Data at the end of last week showed consumer sentiment in the world's biggest economy dropped to a near one-year low in July and consumer prices fell for a third month in June, highlighting the sluggishness of the US recovery.

World stocks as measured by MSCI edged down 0.2 per cent, having earlier fallen by as much as 0.5 per cent, while its emerging market counterpart lost 0.6 per cent.

In Europe, the FTSEurofirst 300 index recovered from an early fall to be 0.2 per cent higher on the day. Asian stocks excluding Japan fell one per cent.

"There was a bit of a wobble earlier on with BP dragging down the markets, but buyers have been returning with sentiment being helped by M&A talk in International Power," said David Jones, chief market strategist at IG Index.

"I expect the market to gradually claw back gains throughout the day as investors await International Business Machines figures due out after the market close."

However, investors sold shares in Austrian banks because of their exposure to Hungary after the IMF and the EU suspended a review of Hungary's funding programme, meaning it will not have access to remaining funds in its $25.1 billion (Dh92 billion) loan package.

Erste group bank fell 0.6 per cent and Raiffeisen international shares slid 1.5 per cent.

BP shares shed two per cent as investors fretted about possible seepage from the company's capped Gulf of Mexico well.

Sentiment for the euro was dented after Moody's cut the credit rating of Ireland by one notch to Aa2. However, taking the sting out of the downgrade, the rating agency placed the new rating on a stable outlook.

Traders also said the Irish downgrade did not come as a surprise given Moody's had a negative outlook on the country but the timing did briefly unsettle markets.

The euro fell to a session low at around $1.2870 in the wake of Moody's move, but swiftly recovered to $1.2960, up 0.2 per cent on the day. Against the yen, the single currency gained 0.9 per cent to 112.88.

Near-term support for the euro is seen around the $1.2850 area, the 50 per cent retracement of the euro's fall from a high near $1.3820 on March 17 to a four-year low of $1.1876 hit in early June.

Analysts said the recent rebound in the euro, which hit a two-month high of $1.3008 on Friday, might be overdone.

"The euro's recent strength has been exaggerated by positions, as people scale back from extremely short [euro] positions," said Raghav Subbarao, currency strategist at Barclays Capital.

"As people square positions, we don't see much further upside from here."

The dollar was little changed against a basket of major currencies. With stocks recovering, demand for safe-haven government bonds fell, driving yields higher.