Japan hinted on Wednesday it might do more to ease credit and Britain awaits more data before doing the same, while disappointing earnings from Morgan Stanley and Wells Fargo tempered optimism Wall Street can extend its recent rally.

Underscoring the cautious tone, World Trade Organization Director-General Pascal Lamy said that it was too early to see if measures to improve trade financing were working, while Federal Reserve Chairman Ben Bernanke again warned of economic pitfalls ahead.

A third-consecutive quarterly loss at big U.S. bank Morgan Stanley (MS.N) and rising credit losses at Wells Fargo & Co (WFC.N) helped nudge the S&P 500 .SPX lower by late-morning, after the broad-based index posted nearly 9 percent gains in little over a week.

There's fear of more losses across the financial spectrum, said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis. Regardless of what (banks) did in the second quarter, the thought is there's more bad (news) to come.

Earlier on Wednesday, Bank of Japan Deputy Governor Hirohide Yamaguchi hinted he could favor extending the central bank's steps aimed at easing credit beyond a December deadline.

But Bank of England policymakers voted unanimously this month to defer whether to change their quantitative easing policy until August, when they will have a quarterly inflation report to look at.

U.S. policymakers were similarly wary. Bernanke, back on Capitol Hill to finish the second part of his congressional testimony, underlined the dangers posed by rising unemployment and commercial real estate loans. He also said some banks were still short of capital.


That cautious tone chimed with the WTO's Lamy, who said it was too early to see if measures to improve trade financing were working.

Has it worked? A bit too soon to say, Lamy told a news conference in Singapore after talks there with ministers from the United States, China and other Asia Pacific Economic Cooperation members.

The WTO said world trade volumes will shrink 10 percent this year, though Lamy said Asia was leading a trade recovery.

Although markets rallied strongly in the spring as the global economy pulled out of a severe downward spiral, hopes of a second-half recovery have been dampened in recent weeks because of disappointing economic data in Europe and the United States.

Eurozone industrial orders did nothing to alleviate this, plunging nearly a third year-on-year in May and fell from April despite expectations of a rebound.

These orders are disappointing. We were looking for a substantial increase really on a monthly basis in May, Juergen Michels, an analyst at Citigroup, said.

Michels said the orders data looked inconsistent with other indicators from the eurozone area, but if confirmed by other data it would show the region remained mired in crisis in the second quarter.


After a brutal slump that began in the second half of 2008 and extended to at least the first quarter, the global economy is struggling to recover, spurred by low interest rates and hundreds of billions of dollars in stimulus spending by governments.

French consumer spending last month rose much more than expected, showing shoppers were helping the eurozone's second-largest economy.

But the Bank of Japan's Yamaguchi, speaking in Hakodate, Japan, emphasized the bank would focus on downside risks to the economy, although it did not expect a deflationary spiral.

While Yamaguchi said he had no fixed view on whether the BOJ would extend beyond December its corporate funding support measures, analysts said his cautious view suggested it could be some time before it exits those measures.

Corporate finance has stopped deteriorating, and spreads are coming in gradually, said Satoru Ogasawara, an economist at Credit Suisse in Tokyo.

But Yamaguchi is cautious about the future. If finance conditions remain tight, I think they will extend the corporate finance measures again.

In London, analysts said they believed the Bank of England's Monetary Policy Committee was finely balanced on whether to spend another 25 billion pounds buying assets to boost credit and to keep interest rates at 0.5 percent.

It might mean they don't sanction the extra 25 billion pounds at the next meeting. But it's a close call -- unless the data surprises on the downside, I suspect they won't, said George Buckley, chief UK economist at Deutsche Bank.

The BoE has the leeway to take the easing total to 150 billion pounds ($245.9 billion). Beyond that it would have to get permission from the government.

The policy committee said Q2 gross domestic product data, due on Friday, would probably show a smaller fall than it had thought in May and surveys also suggested there was more momentum going into the second half.

Asian shares hit a 10-month peak over the day, with MSCI's index of Asia-Pacific stocks outside of Japan .MIAPJ0000PUS rising for a seventh straight session.

European markets showed the recent surge might be tempting investors to take profits, as the FTSEurofirst 300 .FTEU3 inched higher.