World stocks edged up on Thursday from this week's 11-month low as higher U.S. stock futures calmed frayed investor nerves after a steep sell-off triggered by concerns about the U.S. economic slowdown and the euro zone banking system.
The euro and oil rose while buying by the European Central Bank pushed Italian and Spanish government bonds higher. But investors remained reluctant to place long-term bets as trading remained volatile.
The dollar briefly jumped above 77.00 yen from near record lows, triggering talk about possible intervention. But dealers reported no action from Japanese monetary authorities and it quickly fell back.
European banks sought to secure dollar funding beyond one week in the currency derivatives market, pushing one gauge of funding costs to the highest levels since the 2008 crisis as investors and banks hoarded funds to protect themselves from further market volatility.
On Wednesday, a stream of rumors about a sovereign rating downgrade of France and concerns about the health of French banks caused the biggest widening in the benchmark index of European credit default swaps since 2008.
The three major rating agencies later reaffirmed France's AAA rating, and said its outlook was stable, but markets remain concerned that French banks are among the most exposed to a worsening of Europe's government debt crisis.
We had slightly more positive equity markets in Asia so therefore the risk aversion is not as strong today, said You-na Park, currency strategist at Commerzbank.
The debt crisis weighs on the euro but on the other hand there are doubts regarding the U.S. economy.
The MSCI world equity index was up 0.5 percent while European stocks rose 1.3 percent. U.S. stock futures rose 1.8 percent after Wall Street
The benchmark MSCI index had slipped into bear market territory earlier this week by falling more than 20 percent from its three-year high in May, but has since inched up.
Emerging stocks rose 0.3 percent, also off this week's 11-month low.
U.S. crude oil rose 1.2 percent to $83.82 a barrel.
The euro rose 0.5 percent to $1.4230.
MONEY MARKET STRESS
Investors are extremely sensitive about any sign of funding stress in the interbank market, one of the first areas to deteriorate at the early stage of the credit crisis in 2007.
On Thursday, the one-year yen-dollar cross-currency basis -- which reflects the premium for swapping yen LIBOR into dollar LIBOR -- extended its rise to 56 basis points briefly, the highest since November 2008.
Bund futures fell 28 ticks in volatile trading, with traders saying the European Central Bank was buying Italian and Spanish government bonds in small amounts to protect the two markets from contagion fears.
Investors are hugely worried about the spread of the debt contagion and the economic status of the U.S. Each sell-off is effectively a cry for help to politicians and central banks to reach a solution to the debt crisis, Jimmy Yates, head of equities at CMC Markets, said.
Italian 10-year bond yields were 4 basis points lower on the day at 5.068 percent, while their Spanish equivalents were 3.4 bps down at 5.004 percent.
The dollar fell 0.2 percent against a basket of major currencies. The U.S. currency has been under pressure from speculation the Federal Reserve may launch a third bond-buying program to bolster the economy. It has pledged to keep interest rates near zero for two more years.
The dollar was down 0.5 percent at 76.51 yen. Investors are wary of possible coordinated intervention after Japanese Finance Minister Yoshihiko Noda said that he would work closely with the global community to maintain market stability.