World markets on edge after worst turmoil in four years

Investors worried about end of US stimulus, global economic growth

Global markets showed some signs of stabilisation on Thursday after their most turbulent day in four years, but worries about world growth and the end of years of US stimulus kept investors in a fraught mood.

European stocks bounced 1% as the region's bourses opened after Wednesday's 3.2% plunge, but fell back into the red soon after on concerns about a bond market sell-off in the debt of peripheral euro zone countries.

In the currency markets, the US dollar started to slip again after one of its sharpest drops of the year while the safe-haven Japanese yen and gold both held on to most of their gains, leaving them near their highest in a month.

"Markets are likely to be picking up the pieces today and trying to work out where we go from here," said Rabobank strategist Michael Every.

"In Europe we only have final September CPI, but in the US there are initial claims, industrial production, the Philly Fed, and the NAHB housing survey. To say that the market's patience for weaker-than-expected reports will be limited is an understatement."

Assets which depend on economic growth, such as shares and oil, have been hit by a raft of weak indicators from Europe at a time when other big economies, including China, Japan and Brazil face their own hardships.

These come as the US Federal Reserve prepares to wind down later this month the asset purchase programme that has boosted markets over the past two years. Many observers doubt new measures from the European Central Bank will make up for it.

The borrowing costs of some of the euro zone's most highly indebted southern states climbed again on Thursday. Markets have also been rattled by fears the fragile government in Greece, one of the countries at the centre of the region's debt crisis, could fall.

Greek 10-year bond yields edged up 9 bps again to 7.94 on Thursday after their biggest two-day sell off since October 2008.

One of Greece's euro partners told Reuters late on Wednesday that Athens was changing its mind about quitting its EU/IMF aid programme next year, while a source said on Thursday the ECB would make it easier for Greek banks to tap its cheap funding.

Portuguese, Spanish and Italian 10-year yields rose too, edging up 5 bps to 3.36, 2.45 and 2.15% respectively and pulling further away from Germany's benchmark Bunds which hovered at 0.78%.

US GLOOM

Wednesday's turmoil had sparked a safe-haven rally in US Treasuries and pushed the yield on the benchmark 10-year note as low as 1.865%, its lowest since May 2013. It last stood at 2.08% in Europe.

Only a month ago, markets were thinking the Federal Reserve could hike US rates as early as June next year, but after a stormy last few weeks traders have pushed back their expectations until the first quarter of 2016.

Wall Street stocks have been slammed too. The benchmark S&P 500 as well as MSCI 45-country world index has lost almost 10% in the last three weeks. US stocks are still up 170% since the depths of the financial crisis in 2009 though.

The dollar's index against a basket of six major currencies stood at 84.967, down about 0.2% on the day and near levels last plumbed in September.

"For those who were looking to buy the dollar, this was a very healthy correction," said Kaneo Ogino, director at Global-info Co in Tokyo, a foreign exchange research firm.

As European trading gathered pace, however, it was starting to backslide again and was last at 105.87 yen having been as high as 106.32 in Asia. The euro hovered at $1.2815 after rising as high as $1.2885 overnight, its highest level since last month.

The dollar's sharp fall overnight lent modest support to battered oil prices but they were back down at new 4-year lows in London.

Brent crude has lost more than 28% since June amid slow demand and abundant supply, with losses accelerating in recent weeks on signals that the Organization of the Petroleum Exporting Countries will not cut output.

It was at $82.97 a barrel at 0815 GMT while, US crude fell over a dollar to $80.58 a barrel. It hit a low at $80.01 on Wednesday, the weakest since June 2012.

Spot gold was steady at $1,239.60 an ounce, not far from a one-month high of $1,249.30 on Wednesday while copper added about 0.3% to $6,656.25 a tonne after shedding 2.3% the previous session, its biggest daily drop since March.