Markets rebound ahead of Davos

As the global financial and business elite gather in Davos, Switzerland, for World Economic Forum (WEF) which commences today, world shares hit a new 20-month high after Japan launched its boldest attempt yet to lift its stagnant economy, though the gains were cropped by a flare-up of concerns about Germany's banks.

The Bank of Japan, which has been under intense political pressure to overcome deflation and generate growth, hiked its inflation target to 2 per cent and said that from 2014 it would adopt an open-ended commitment to buy assets to ease monetary conditions. The move surprised markets, which had expected another incremental increase in its 101 trillion yen ($1.12 trillion) asset-buying and lending programme, though the delay before the easing measures kick in dulled the impact and saw the yen edge higher against the dollar.

European shares, which have been testing two-year highs in recent days, experienced a turbulent morning as markets latched on to a report that German regulators were simulating a separation of some banks' operations, and on rumours - later denied - that Deutsche Bank was preparing a profit warning. Frankfurt's DAX fell as much as 1.4 per cent but had clawed back half of the losses by mid-morning. London's FTSE 100, Paris's CAC-40 and Madrid's IBEX were between flat and down 0.3 per cent, leaving the FTSEurofirst 300 down 0.2 per cent on the day. In Dublin, the Iseq was up by 0.1 per cent at 11.30 am.

In Germany, stocks fell the most in a week as the country's financial regulator, Bafin, was said to ask Deutsche Bank to simulate a split, out-weighing a report that showed investor confidence rebounded this month. Deutsche Bank dropped 2.1 per cent, paring an earlier plunge of 4 per cent. Continental, Europe's second-largest maker of auto parts, lost 1.5 per cent. RWE fell by 1.7 per cent after Macquarie Group lowered its recommendation for the shares. The DAX Index declined 0.5 per cent to 7,713.77 at 12:46 p.m. in Frankfurt, after earlier slumping as much as 1.5 per cent.

“We are hearing some chatter that is weighing on the market," said Stephane Ekolo, chief European strategist at Market Securities in London, "Deutsche Bank may guide lower. These rumors, coupled with the fact Bafin has asked two banks to simulate a split-bank model, are taking their toll on the markets."

In the US, stock index futures fluctuated between gains and losses as investors awaited a report on existing home sales and earnings from companies including Johnson and Johnson and Freeport-McMoRan Copper and Gold.

DuPont advanced 1.1 per cent in early New York trading as fourth-quarter profit beat estimates. Caterpillar Inc. fell 1.8 percent after taking a $580 million charge for accounting misconduct at a Chinese unit. Boeing Co. slipped 1.3 per cent after halting deliveries of its grounded 787 Dreamliner until regulators say its batteries are safe.

“People have rather low expectations for U.S. earnings because corporate leaders were very moderate in outlook, and that's good for the reality versus the guidance,” said Didier Duret, chief investment officer at ABN Amro Private Banking in Amsterdam. “Even moderate earnings from the US will be fine. The trigger point for markets will be economic reports, including home sales,” he said.

Additional reporting: Bloomberg