World stocks steadied while the dollar hit one-week highs on Wednesday as investors took heart from firmer U.S. stock futures and banking stocks, which calmed investor jitters about the impact of the credit woes on the financial sector.
This week's news that Citigroup received a $7.5 billion capital injection from Abu Dhabi's investment followed a Wall Street Journal report that Citigroup received a call from a prominent investment banker suggesting a merger with Bank of America, although Citigroup dismissed the informal approach.
Even with some encouraging news, investors are not without worries and price action has been choppy. Stress in the money market is worsening, with two-month euro interbank lending rates hitting fresh 6-1/2 year highs.
The outlook on the banking sector holds key to overall investor risk appetite which has deteriorated due to persistent uncertainty over further writedowns by banks.
Banks have had a pretty poor time in the last few weeks. They have been taking a serious kicking. They are getting a bit of a rebound on the fact that... investors are saying they are not such a bad place to be, said Peter Dixon, UK economist at Commerzbank.
The FTSEurofirst 300 index rose 1.3 percent on the day, while the MSCI main world equity index erased early losses to trade steady on the day.
U.S. stock futures rose 0.7 percent, indicating a firmer open on Wall Street.
There was a positive development in investor sentiment after ABX, a derivatives index tied to subprime mortgages, edged higher on Tuesday as the latest batch of U.S. loan performance data showed some signs that delinquencies might be increasing at a slower rate.
Tension in money markets worsened. London interbank offered rates (Libor) -- benchmark lending rates between banks -- for two-month euro rose to 4.73875 percent the highest since May 2001. In early August, rates were below 4.2 percent.
Cash has become less available and more expensive since the credit crunch started in August as banks hoard cash as a contingency against credit-related losses. This general shortage is being exacerbated by liquidity concerns over the seasonally thin Christmas and New Year period.
The level of confidence remains quite low. Banks are still reluctant to lend because of counterparty risk and balance sheet constraints on their own side, said Nathalie Fillet, senior fixed income strategist at BNP Paribas.
The dollar hit one-week highs of $1.4724 per euro and against a basket of major currencies.
UBS's equity flow indicator showed a strong decrease in selling momentum of U.S. stocks last week, while the euro zone suffered the strongest outflow since May this year.
A sustained shift in favor of dollar-denominated assets would certainly assuage dollar-negative sentiment. Also, given that consumer spending is not deteriorating more markedly, there is some risk of a near-term squeeze of short-dollar positions, the bank said in a note to clients.
The iTraxx Crossover index, the most widely watched indicator of European credit market sentiment, narrowed slightly to 376 basis points. Emerging sovereign spreads tightened 10 basis points, while emerging stocks were steady.
The December Bund future was down 45 ticks.
U.S. light crude steadied at $94.48 a barrel before a crucial OPEC meeting next week. Gold slipped to $798.25 an ounce.