European stocks rebounded on Thursday as investors sought bargains after the previous day's sharp sell-off but gains were limited by persistent euro zone fears, with the euro remaining under pressure.
Equity markets plunged on Wednesday and Bunds rallied after Germany unnerved investors by unilaterally banning naked short selling of certain financial stocks, euro zone sovereign debt and related transactions in credit default swaps.
The selloff brought out buyers in Europe on Thursday, with banks among the top performers. The FTSEurofirst 300 <.FTEU3> index of top European shares opened up 0.7 percent.
It's bargain hunting after yesterday's falls, but volatility remains high, said Will Hedden, a sales trader at IG Index. The markets did not take to the German ban and I would not expect to see people piling in too much as the risks to the downside are still very strong.
The June Bund future edged down 9 ticks but markets remained troubled by the general health of the euro zone and the lack of policy coordination amongst European members.
The key negative is that the lack of unity suggests that there are cracks within the EU with regard as to how to deal with this crisis, said Gary Jenkins of Evolution Securities in a note.
World stocks as measured by the MSCI All-Country index <.MIWD00000PUS> were flat whilst the more volatile emerging markets index <.MSCIEF> was down 0.75 percent.
In the past few days we have seen good economic activity numbers and good momentum in economic readings but the market is more focused on financial stability risks and sovereign risks, said Murat Toprak, a strategist at Societe Generale in London.
The data coming through now is good but the fear is they will deteriorate going forward -- the market is shrugging off all this because of the outlook.
The euro remained vulnerable, slipping back to $1.2414, with extreme short positioning exacerbating moves in nervous trade.
The bias for the euro is still lower but concerns over excessive short positioning mean the price action will be very volatile, said Geoffrey Yu, a currency analyst at UBS.
The single currency slumped to a four-year low against the dollar on Wednesday before rebounding 1.7 percent, its biggest one day gain in more than a year as traders covered short positions on speculation that European monetary officials might step in to support it.
A European Central Bank spokesman declined comment on the market rumors and Eurogroup Chairman Jean-Claude Juncker said in Tokyo he did not see a need to take immediate action.
High yielding currencies came under pressures, with the Australian dollar down around 2 percent versus the U.S. dollar and the yen as investors dialed back risk exposures.
The U.S. dollar slipped slightly versus a currency basket <.DXY> to trade at 86.20 after surging to a 14-month high of 87.458 on Wednesday on safe-haven demand.
Earlier in Japan, the Nikkei <.N225> fell to a new three-month low, down 1.54 percent, as exporters came under pressure again on fears that fiscal tightening in the euro zone would affect company earnings.
The MSCI index of Asia-Pacific shares excluding Japan <.MIAPJ0000PUS> fell 1.4 percent to a new three month low, and is down nearly 10 percent year to date.
In fixed income markets a busy supply schedule weighed on the market with Spain auctioning up to 4 billion euros of 2020 paper and France offering up to 8 billion euros of bonds.
(Additional reporting by Joanne Frearson, Neal Armstrong, Sujata Rao; editing by Mike Peacock)