European shares may rise on Wednesday on speculation the Federal Reserve may signal further policy moves to support the struggling U.S. economy, even as a rally in Asian stock spluttered out.
Japanese assets showed a muted reaction to a downgrade of Tokyo's government debt by ratings agency Moody's, while the dollar fell slightly versus the yen after Japan unveiled a $100 billion credit line to help companies deal with the impact of a strong currency but shied away from intervening in the markets.
Gold climbed more than 1 percent, after tumbling from a record high on Tuesday as investors switched money back into shares, propelling U.S. stocks up around 3 percent.
Wall Street's rally, perversely, was driven by more dismal U.S. economic data, which raised expectations that Federal Reserve Chairman Ben Bernanke will use a speech on Friday at a central bankers' conference in Jackson Hole, Wyoming, to signal a fresh monetary offensive to fend off a renewed recession.
Euro STOXX 50 futures rose 0.9 percent, Germany's DAX futures were up 0.9 percent and France's CAC futures up 0.6 percent, while financial bookmakers called London's FTSE 100 to open as much as 0.8 percent higher.
Last year, Bernanke used the Jackson Hole meet to prepare the ground for the Fed's second round of quantitative easing, a $600 billion bond-buying program designed to pump cash and confidence into financial markets that became known as QE2.
The market is becoming more pessimistic about the economic outlook and is responding by pricing in a greater chance of QE3, said Bricklin Dwyer, economist at BNP Paribas, in a client note.
But while Bernanke is expected to acknowledge his disappointment over the pace of growth in the economy, many Fed watchers say the chances of a major new bond buying operation being announced at Jackson Hole are limited.
I think we'll see (QE3) because America needs growth, but I don't think we'll necessarily get it on Friday, said Neil Dwane, chief investment officer for Europe at RCM.
Asian shares opened higher but swiftly retreated into negative territory, with Japan's Nikkei share average falling 1.1 percent, while MSCI's broadest index of Asia Pacific shares outside Japan lost 0.8 percent.
S&P 500 futures fell 0.9 percent, suggesting Wall Street's rebound may be coming to a halt for now.
World stocks have tumbled this month on fears the United States is slipping back into recession and as Europe's sovereign debt crisis worsens.
The MSCI index remains down 14 percent for the month so far, and about 18 percent below is April high.
Moody's announced shortly before Asian markets opened that it was cutting Japan's credit rating by one notch to Aa3, mirroring an earlier downgrade by rival S&P, blaming large budget deficits and a buildup of debt since the global recession of 2009.
It's been a while since Japan lost its triple-A status, so it is unlikely that Japan's interest rates will rise sharply, said Fumiyuki Takahashi, managing director at Barclays Capital.
The dollar quickly came off an intraday high of 76.88 yen, and was trading slightly down on the day around 76.60 after Japan's statement on the yen.
Tokyo's new credit line will facilitate firms' acquisitions overseas and their procurement of energy and resources from abroad, but analysts were skeptical the measures would calm markets after the yen hit a record high of 75.941 last week.
The scheme treats the symptoms not the underlying cause, said Todd Elmer, currency strategist at Citi in Singapore.
Japanese government bond September 10-year futures fell initially after the Moody's announcement, but reversed course as equities slipped to trade up 0.18 point at 142.73, and the benchmark 10-year yield dipped 0.5 basis point to 1.005 percent.
Japanese government bonds are insulated by the fact that the vast majority of Tokyo's debt pile is domestically held.
JGBs have tended not to show any lasting reaction to ratings downgrades in the past -- probably because in Japan the problem if anything is one of over-saving, which banks recycle into JGBs, which remain 'risk free assets', said Naomi Fink, head of Japan strategy at Jeffries Japan.
Gold was up about 1 percent just below $1,850 an ounce, after suffering its biggest one-day fall in 18 months on Tuesday. Gold's safe-haven appeal has driven it to a series of records in recent months.
U.S. crude oil, which has tended to follow equities in recent months, fell 0.2 percent to $85.30 a barrel.
(Additional reporting by Ian Chua in Sydney; Editing by Richard Borsuk and Ramya Venugopal)