European stocks sank Tuesday along with oil prices, while the euro slumped towards parity with the dollar on deepening recession fears as central banks contend with soaring inflation.

European stock markets fell nearly three percent, weighing on Wall Street early in the day before US stocks staged a turnaround.

"Fears about the health of the world economy are circulating and that is why we are seeing major declines in stocks, energies, and industrial metals," said market analyst David Madden at Equiti Capital.

The euro sank to a 20-year dollar low of $1.0238 as investors eyed aggressive interest rate hikes by the US Federal Reserve in its fight against inflation, in contrast with the European Central Bank, seen as planning more modest increases.

The main international crude oil contract, Brent North Sea, fell nearly 10 percent, while the main US contract WTI, fell more than eight percent to finish under $100 per barrel for the first time in around two months.

"There are increasing worries the elevated energy prices will chip away at demand, hence the fall in the oil contracts," said Madden.

Sentiment in Europe was shaken by the latest survey data showing economic growth in the eurozone floundered in June.

S&P Global's closely-watched monthly purchasing managers' index (PMI), which measures corporate confidence, fell to 52.0 in June from 54.8 in May.

Nevertheless, the reading, which was a 16-month low, remains above the 50-point level signalling expansion.

"Growing fears of a recession are hammering the euro lower, whilst the dollar is soaring on bets that the Fed will keep hiking rates aggressively to tame inflation," City Index analyst Fiona Cincotta told AFP.

"Today's PMI data from Europe have highlighted the risk of slowing growth at the end of the second quarter and raise the prospect of a contraction in activity in the coming months."

Walid Koudmani, chief market analyst at XTB, said "the ECB is caught between a rock and a hard place as it needs to raise interest rates to tackle inflation and boost its currency while simultaneously supporting struggling economies which are just recovering after two years of pandemic related issues."

While US stocks spent the morning deep in the red, equities rallied in the afternoon, enabling two of the three major indices to finish higher.

The shift came as the yield on the 10-year US Treasury note, a proxy for interest rates, fell further below three percent.

"The concern of a recession is deepening," said Quincy Krosby of LPL Financial, who noted the correlation between tech shares and drops in Treasury bond yields.

"You look for growth, where you can find it," Krosby said. "Many of those large tech names that have been beaten up by the market become attractive again, particularly when the bond yields are lower."

Traders are hopeful that Joe Biden is about to wind back some of the tariffs imposed on China by Donald Trump
Traders are hopeful that Joe Biden is about to wind back some of the tariffs imposed on China by Donald Trump AFP / Nicholas Kamm

Euro/dollar: DOWN at $1.0266 from $1.0422 Monday

Pound/dollar: DOWN at $1.1956 from $1.2118

Euro/pound: DOWN at 85.85 pence from 86.00 pence

Dollar/yen: UP at 135.87 yen from 135.62 yen

Brent North Sea crude: DOWN 9.6 percent at $102.57 per barrel

West Texas Intermediate: DOWN 8.8 percent at $98.94 per barrel

New York - Dow: DOWN 0.4 percent 30.967,82 (close)

New York - S&P 500: UP 0.2 percent at 3,831.39 (close)

New York - Nasdaq: UP 1.8 percent at 11,322.24 (close)

London - FTSE 100: DOWN 2.9 percent at 7,025.47 (close)

Frankfurt - DAX: DOWN 2.9 percent at 12,401.20 (close)

Paris - CAC 40: DOWN 2.7 percent at 5,794.96 (close)

EURO STOXX 50: DOWN 2.7 percent at 3,359.83 (close)

Tokyo - Nikkei 225: UP 1.0 percent at 26,423.47 (close)

Hong Kong - Hang Seng Index: UP 0.1 percent at 21,853.07 (close)

Shanghai - Composite: FLAT at 3,404.03 (close)

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