(Reuters) - Stocks and the euro recovered early losses on Wednesday after China surprised with its first cut in banks' reserve requirements for nearly three years, moving into easing mode as Beijing looked to soften the country's economic slowdown.
At 1203 GMT, the FTSEurofirst 300 .FTEU3 index of leading European shares was up 0.9 percent at 956.49 points, after earlier being as low as 936.66. U.S. stock index futures .DJI .SPX .IXIC also pointed to a higher open on Wall Street.
Markets had fallen earlier on the back of a cut in financial sector ratings that added to worries about the fallout of the euro zone's debt problems as time ran out for policymakers to quell the two-year-old crisis.
A deal by euro zone finance ministers' to boost the firepower of the regional bailout fund, agreed late Tuesday, was seen as inadequate, and the Standard & Poor's downgrade of a host of leading banks fuelled the early selloff.
The China move, which lowers the reserve ratio for China's biggest banks to 21 percent, to free up cash for small firms crimped by credit market strains, ironically came just after Chinese stocks posted their biggest 1-day slide since August on the belief it was not about to ease monetary policy.
It's a surprising move -- the market was not expecting the central bank to (cut RRR) so fast, Shi Chenyu, economist with the investment banking unit of Industrial and Commercial Bank of China said. The move sends a clear message that the central bank is ready to relax its policy stance.
The euro also rose, although it was flat by 1204 GMT, while the dollar reversed early gains against a basket of major currencies .DXY to also trade flat.
This has just generated a bit of a bid for risk generally but typically moves on the back of Chinese policy announcements tend to be short-lived, said Adam Cole, global head of FX strategy at RBC Capital Markets.
THE FINAL COUNTDOWN
While Bund futures also pared gains, they soon recovered all of that and more as traders focused on politicians' persistently underwhelming policy response to the euro zone debt crisis.
Concern the boosted bailout fund would still be insufficient to deal with the crisis pushed peripheral bond yields higher and prompted dire warnings from several leading figures.
A top Italian regulator said there was a risk of the euro breaking up if the European Central Bank's role in fighting the crisis remained unchanged, while the EU's monetary chief said the region had ten days to act.
The EFSF is already funding at very wide (borrowing) levels over Germany, struggled in its last auction to raise the required funds and would have its rating put under severe pressure by any rating downgrade of France, Rabobank strategists said in a note.
This must call into question any plans related to the EFSF. It is yesterday's solution and the market has simply moved on.
Italy has talked to the IMF about extra financial support to cope with the crisis but no decision has been taken, several sources close to the situation said.
Italian and Spanish 10-year government bond yields both rose on Wednesday, widening the spread to Bunds to 516 basis points and 426 basis points, respectively, with the move cooled somewhat by reports of ECB bond buying.