Europe rides rebound as global sell-off abates for now

European stocks jumped the most in seven months and oil and southern euro zone bonds rebounded sharply today as investors poured back into beaten-down markets as the week’s volatility frenzy continued.

Nerves remained fragile, but some reassuring words from US and European policymakers, better US data, and a sense there could be bargains to be had after another big week of equity and commodity falls, drew buyers in off the sidelines.

Bourses in London, Frankfurt and Paris had jumped 1.1 to 2 per cent by mid-morning as Greek bonds steadied after their worst week since the height of the euro crisis and Athens stocks surged 5.5 per cent. In the currency market the yen was off recent highs after another choppy session overnight, while oil kicked clear of the four-year lows it has hit this week amid global growth worries and fears of oil market oversupply.

“It’s been a very lively week, but it seems a bit calmer today,” said Alvin Tan, a FX market strategist at Societe Generale in London. “People are hoping to hear some soothing words from policymakers and it wouldn’t be surprising to hear some dovish comments.. and that kind of rhetoric would certainly help settle markets.”

Central bankers from Europe were out in force. One of the European Central Bank’s longest-serving members, Ewald Nowotny, said it had more ammunition at its disposal while the Bank of England’s chief economist said UK rates may need to remain low for longer than previously thought. “Put in rather plainer English, I am gloomier,” the BoE’s Andrew Haldane said.

The possible return to recession in the euro zone, a floundering economy in Japan, a slowing China and the Ebola crisis have rattled investors already nervous about the end of years of US stimulus. It has triggered the highest volatility and trading volumes since 2012’s peak in the euro crisis, and with bond yields already measly in the US and other traditional safe ports like Germany and Japan, investors are struggling for options. Despite today’s rally, US and Europe stocks and oil markets were on track for a fourth straight week of falls. For growth-dependent emerging markets it was six and left MSCI’s all world index which covers 45 countries, at its lowest level since January.

But for the day at least Europe was riding the rebound, Greek bond yields were down a full percentage point, and US stock futures pointed to a strong 1-1.4 per cent jump for Wall Street later.

Asia markets stayed in the doldrums overnight, however. Tokyo's Nikkei led the losses, falling 1.3 per cent on the day and 5.0 per cent on the week, its biggest weekly fall in six months. Mainland Chinese shares also posted their biggest fall in four months on worries over the economy and as investors brace for a landmark trading link between Hong Kong and Shanghai bourses. U.S. markets were already digesting a flurry of company earnings from global giants General Electric, Honeywell and Morgan Stanley and were also waiting on a speech from Federal Reserve chief Janet Yellen later in the day.

Topping the list of topics markets are hoping she addresses is the current market volatility. The so-called fear gauge eased slightly today but has spiked to 30- month highs this week as markets have lurched lower. Comments from James Bullard, the head of the St. Louis Federal Reserve Bank, had helped settle markets on Thursday as he said the Fed may want to keep up its bond-buying stimulus for now, given a drop in inflation expectations.

There was also a strong round of data. New unemployment benefit claims fell to a 14-year low and September industrial output rebounded sharply, suggesting the US economy remains strong for now.

Reuters