By Richard Hubbard
(Reuters) - European shares and the
euro steadied on Tuesday, a day after a sharp selloff caused by rising
political risks in southern Europe, as new data confirmed the region's economy
is showing clear signs of recovery.
The euro, which had taken the brunt of
the selling and fallen from a high of over $1.37 at the end of last week to
below $1.35 on Monday, recovered to be up 0.1 percent at $1.3530.
European shares which have tracked a similar path from
closing near two-year highs on Friday to shedding most of the year's gains in
Monday's sell-off, also staged a modest advance.
Most analysts see this week's gyrations as a necessary
correction to a rally linked to signs of increasing euro
zone economic
stability and an improving global outlook, underpinned by the easier monetary
policies of major central banks.
"What we are looking at, at the moment, is a
correction, a consolidation or even a 'baby risk-off'," said Philippe
Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels,
referring to investors selling higher risk assets.
"Nevertheless our working hypothesis remains
that, after the correction, the trends in place before will continue, as the
two main drivers are still there - namely central banks continuing to inject
liquidity and more and more proof of an economic recovery," he added.
The markets regained composure on Tuesday after new
data confirmed the euro zone's still struggling economy was starting to turn
around.
Markit's Eurozone Composite PMI, which gauges business
activity across thousands of companies and is seen as good gauge of future
growth, rose in January to a 10-month high of 48.6 - though this still means
the region's economy is contracting.
"The euro zone is showing clear signs of healing,
with the downturn easing sharply in January and the region moving closer to
stabilization in the first quarter," said Chris Williamson, chief
economist at Markit.
But the data also highlighted a growing divergence in
the euro zone between the performance of its biggest economy, Germany, and those of other partners, leaving some lingering
doubts about the region's prospects.
Markit's composite German PMI chalked up its biggest
one-month rise since August 2009, reaching its highest since June 2011. But in
neighboring France it fell to its lowest level in nearly four years.
"The downturn we saw at the end of last year is
starting to peter out, but I don't think we're going to see any spectacular
growth yet," said Peter Westaway, chief European economist at Vanguard
Asset Management.
After the data the broad FTSE Eurofirst
300 index of top European shares was up 0.5 percent while London's FTSE 100,
Paris's CAC-40 and Frankfurt's DAX were between flat and 0.5 percent higher.
Analysts said the euro and equity market could see
further volatility on Thursday when the European Central Bank holds its monthly
policy meeting and President Mario Draghi is due to address a news conference.
GLOBAL CORRECTION
MSCI's world equity index was down around 0.2 percent
reflecting an earlier sell-off across Asia when investors joined in the global
correction in prices and ignored positive economic news fromChina.
The HSBC China services purchasing managers' index
rose to a four-month high of 54 in January, underlining the strengthening
momentum in the world's second-biggest economy, which is expected to grow 8.1
percent this year.
The MSCI index of Asia-Pacific shares outside Japan was down 0.9 percent, led by a steep 1.7 percent fall
in Hong Kong shares, after the pan-Asian index had climbed to an 18-month high
on Monday.
Investors will next look at data from the vast U.S.
services sector, due later on Tuesday, to gauge the monetary policy outlook;
recent releases have painted a mostly upbeat picture of the world's largest
economy.
U.S. stock index futures pointed to a slightly firmer open on Wall Street ahead
of the data after the renewed worries about the euro zone saw the S&P 500
index post its worst day since November on Monday.
BONDS STEADY
Bond markets were also stabilizing on
Tuesday after the sudden upsurge in political worries about Spain and Italy had sparked a sharp rise in yields on peripheral euro
zone debt and fresh demand for safe-haven German government bonds.
Spanish 10-year government bond yields
eased back 1.5 basis points to 5.43 percent, while equivalent Italian yields
were a single tick lower at 4.47 percent.
German Bunds meanwhile rose slightly to be
up 1.5 basis points at 1.63 percent.
Commodity markets were moving in opposing
directions.
Oil, which has dropped almost 1.5 percent
since the start of the month, had inched up to $115.60 per barrel, while
growth-attuned copper, platinum and palladium all slipped from multi-month
highs, dragged down by patchy U.S. data and a stronger dollar.
Gold, which has been trapped in a tight
$1,660 to $1,680 range since late last week, again saw little movement with
investors increasingly wondering whether its 12-year rally is now over.
Monetary stimulus was a key driver of
gold's rise in the last few years, and an improving U.S. economy has stirred
thoughts that the Federal Reserve might curtail the bond-buying that has
dominated its support efforts.
"There was some physical buying interest
around $1,660, but not much at this level," said Ronald Leung, a dealer at
Lee Cheong Gold Dealers in Hong Kong.
"People are mostly waiting for more
data from the United States to assess how the economy is and whether
quantitative easing will continue."
(Additional reporting by Marc Jones and
Atul Prakash; Editing by Alastair Macdonald)
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