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London - World stocks steadied on Wednesday after their biggest one-day plunge in over a year but fresh banking stress and fears of a double-dip global recession preyed on investors on the final day of a torrid second quarter.
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 3% on Tuesday.
The index has recorded its worst quarter since the final three months of 2008 when the demise of Lehman Brothers sent world markets and the economy in to a tailspin.
Traders awaited the outcome on Wednesday of the European Central Bank's latest bank refinancing operations as €442bn of one-year emergency funding is due to be paid back to the central bank on the first day of third quarter on Thursday.
The ECB holds a three-month tender that many in the market expect will be tapped as banks scramble to pay back the one-year funds. Expectations are that €210bn will be allotted at the offer.
Analysts reckon there is probably enough additional, if shorter-term, ECB financing tools to make up the drain caused by the maturing one-year loans.
"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 looming publication of European bank stress tests next month has added to the fresh nerves about the sector.
The FTSEurofirst 300 index of European stocks was 0.25% higher on Wednesday from a three-week closing low in the prior session. European banking stocks rebounded 0.6%.
Safe-haven German government bond futures for September delivery were 0.11% higher at 129.57.
"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 US employment data were also likely to weigh.
US 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. US stock futures pointed to a slightly higher open on Wall Street later.
Confluence of fears
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 US 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 US consumer confidence.
Chinese stocks fell 1.2%, extending a 4% slide on Tuesday to a new 14-month low, as tight market liquidity forced investors to sell shares to make room for a major initial public offering by Agricultural Bank of China.
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.
"Equity markets in general have been left looking somewhat drained and the question is whether, given these fundamentals plus the backdrop of reigning in stimulus measures and in the longer term rising interest rates, another rally is actually sustainable," said Ben Potter, analyst at IG Markets.
The euro rebounded after two days of steep losses. By 09:00 GMT, the euro edged up 0.3% to $1.2221, still not far from a two-week low near $1.2150 struck on Tuesday.
- Reuters
