European shares and the euro reversed early losses on Thursday as the impact of the latest massive cash injection by the European Central Bank lifted sentiment, overwhelming fears that further U.S. monetary easing could be on hold.
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Data showing new factory orders for Asia's manufacturing powerhouses perked up a bit in February, easing some concerns about the global economic slowdown.
The FTSE Eurofirst index of top European shares gained 0.3 percent to 1,078.92 points, bouncing back from a session low of 1,071.58. Banks led the recovery, rising more than 1 percent.
However, the euro, which opened down near one-week lows after comments by Fed Chairman Ben Bernanke stopped short of promising further bond purchases to stimulate the economy, and was up just 0.1 percent to $1.3340.
"Some of the euro's underperformance, especially against the commodity currencies, is here to stay. Any rebound feels like it will be sold into unless there is a sustained improvement in euro zone fundamentals," said Valentin Marinov, currency strategist at Citi.
The European Central Bank's second and massive 529.5 billion euros ($708 billion) injection of money into the region's banking system, and Bernanke's comments later on the state of the U.S. recovery, along with improving economic data in Asia are pushing back expectations for further monetary easing.
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"We now expect only one more rate reduction of 25 basis point from the ECB in the second quarter of 2012, and view outright asset purchases as a backstop if the financial and sovereign crisis unexpectedly worsens again," Elga Bartsch, head of European Economics at Morgan Stanley said in a note.
Morgan Stanley had expected 50 basis points of rate cuts by the ECB in the first three months of the year and the start of outright quantitative easing in the second quarter.
But key to any widespread change in rate expectations in Europe will be the health of the region's economy, and data on this remains very mixed.
The euro zone's manufacturing sector contracted for the seventh straight month in February, with factories in the bloc's struggling indebted states in peripheral countires facing some of the toughest conditions on record, new business surveys showed on Thursday.
"Whether the euro zone will sink back into recession in the first quarter remains highly uncertain. The periphery remains the major concern," said Chris Williamson, chief economist at data provider Markit.
China's official sentiment index of purchasing managers and HSBC's private-sector factory data however suggesting there were tentative signs of a recovery in the global economy from a slump in the final months of 2011.
Later in the U.S. investors will be watching a key gauge of its manufacturing sector, the ISM index, which is expected to show a fourth straight monthly improvement in February.
The hints of a pause in U.S. policy easing saw equity markets on Wall Street ease on Wednesday, a move echoed in Asia's session despite the better factory data.
DEBT MARKETS ENJOY ECB RUSH
Wednesday's injection of cash by the ECB has begun to have a big effect on the euro zone debt market with Italian government bond yields now closer to safe haven German government debt than they have been since September last year.
The 10-year benchmark Italian government bond was yielding around 5.5 percent on Thursday, while the two-year bond fell below two percent for the first time since November 2010.
Spain sold 4.5 billion euros of short and medium-term government bonds at lower yields than at previous sales as the ECB cash boosted domestic demand for its debt.
The average yield on Spain's 2015 bond fell sharply to 2.617 percent from 3.332 percent the last time it was sold on Feb. 16.
The improved factory data from Asia and the modest recovery in the U.S. talked about by Bernanke gave oil a lift with Brent crude oil rising above $123 a barrel.
The front month Brent crude futures prices rose 63 cents to $123.29 a barrel, rebounding from an earlier decline to as low as $122.49. U.S. oil was up 15 cents to $107.22.