Global stocks eased on Tuesday as buoyant shares and economic data in China failed to erase concern over the durability of the recent rally, while the yen held firm after a landslide election win for Japan's opposition.
The MSCI world equity index <.MIWD00000PUS> came under pressure on Monday following a near-7 percent decline in the onshore Chinese stock index <.SSEC> -- the worst one-day loss since mid-2008.
The world equity index crept another 0.2 percent lower by 0845 GMT (4:45 a.m. EDT) on Tuesday but held above 10-day lows set in the previous session.
Fears persist that the Chinese government is reining in bank lending to head off potential asset bubbles but data on Tuesday showed the Chinese economy maintained its upward momentum in August, with two purchasing managers' indexes rising to their highest levels in 16 months.
World stocks have rallied more than 3 percent in August to 10-month highs and over 35 percent since the end of March, on signs the global economy may be emerging from recession.
But investors are worrying that the rally in both global and European stocks may be running out of steam.
There's nervousness about the gains given the low volatility over the summer, said Richard Hunter, head of equities at Hargreaves Lansdown.
Investors will take a long hard look at the rally over August, and when we see a move back to risk aversion, there's a move back into defensives.
Oil gained 0.34 percent to $70.21 a barrel, after falling almost 4 percent on Monday.
The FTSEurofirst 300 index <.FTEU3> erased early gains to fall over 1 percent. September Bund futures benefited from the drop in equities, rising 17 ticks.
YEN FIRM POST-ELECTION
The yen softened but held near a seven-week high against the dollar hit on Monday after a victory at the weekend by Japan's opposition Democratic Party.
The yen weakened around 0.17 percent to 93.15 per dollar and 133.60 per euro. The euro was steady against the dollar at $1.4335.
Reviving the Japanese economy is the Democratic Party's top priority with unemployment at a record high and investors concerned about deflation and whether the new government will raise spending and increase still further the country's soaring public debt.
Investors are watching to see whether economic policies will be sufficient to bolster the global equities rally.
Some warning signs have begun to emerge that suggest we may be facing a near-term correction, such as the breakdown in the Chinese stock market and the possibility that the world is at the forefront of a new interest rate policy tightening cycle, said Bob Doll, chief investment officer of equities at BlackRock, in a client note.
We have little doubt that markets will remain volatile, but as long as policymakers remain focused on the downside economic risks, we expect the positive factors will outweigh the negatives.
(Additional reporting by Simon Falush, editing by Mike Peacock)