World stocks partly recover day’s losses, pound rallies as political haggling appears near end

World markets pare losses as pound jumps

LONDON — European stock markets partly recovered from deeper losses Tuesday as Wall Street proved more buoyant than expected, even as the euphoria faded over the European Union’s $1 trillion plan to try to contain the debt crisis sweeping the continent.

The British pound meanwhile rose more than 2 cents amid mounting expectations that the Conservative Party and the Liberal Democrats have finally struck a deal to form a new government that would be headed by David Cameron as prime minister.

In Europe’s main stock markets, the FTSE 100 index of leading British shares closed down 53.21 points, or 1 percent, at 5,334.21 while Germany’s DAX rose 19.80 points, or 0.3 percent, to 6,037.71. The CAC-40 in France ended 27.09 points, or 0.7 percent, lower at 3,693.20.

Europe’s markets had all traded substantially lower earlier in the session — but a bounceback on Wall Street prompted some late buying.

The Dow Jones industrial average was up 21.61 points, or 0.2 percent, at 10,806.75 around noon New York time, while the broader Standard & Poor’s 500 index rose 2.15 points, or 0.2 percent, at 1,161.88 — the performance by U.S. stocks was way better than anticipated in futures markets, which had been pricing a 1 percent decline.

All the world’s major indexes enjoyed one of their best days in months Monday after the European Union unveiled a massive €750 billion financial support package to defend the euro and prevent the debt crisis that started in Greece from spreading to other debtor countries like Portugal and Spain.

“We could well be in for some more volatile, but ultimately directionless, trading in the weeks ahead as investors play a ‘wait and see’ game to assess what shape any contagion takes, and how the bailout plan copes with it in reality,” said Tim Hughes, head of sales trading at IG Index.

Though the EU’s rescue package has helped ease near-term concerns about a wave of defaults across Europe, concerns about the solvency of the indebted countries remain — whether governments, which are still running sky-high deficits, will be able to push through massive austerity measures for years to come remain.

“Unless measures are taken to deal with the underlying structural problems affecting the most indebted of eurozone nations, then the bail out package merely kicks the can down the road,” said Michael Hewson, analyst at CMC Markets.

Moreover, the European Central Bank’s new role in sweeping up government bonds has stoked concerns about its independence from politicians — Axel Weber, president of Germany’s central bank and a leading member of the ECB’s governing council, appeared cautious about the bank’s new responsibility.

Whatever divisions exist within the ECB and whatever pressure may have been put on its President Jean-Claude Trichet to intervene directly in the debt markets, the central bank is on a different course from that being pursued elsewhere — while the ECB is expanding monetary policy, other banks like the U.S. Federal Reserve and the Bank of England are starting to normalize it.

Geoffrey Yu, a currency strategist at UBS, said the ECB’s participation increases the chances that the central bank will be among the last major banks to lift borrowing costs.

“While systemic concerns have dominated recent price action, policy rate differentials could assert themselves beginning in the middle of the year, when we expect several central banks to hike policy rates,” said Yu.

These concerns have dogged the euro all day following Monday’s euphoria, which sent the single European currency up to a high of around $1.31. By late afternoon, the euro was down 0.7 percent on the day at $1.27.

Elsewhere, investors were grappling with a fluid political situation in the U.K.

By the end of the stock market trading session it was looking increasingly likely that a Conservative/Liberal Democrat coalition would be confirmed soon.

Hopes of an imminent conclusion to days of wrangling saw the pound perk up — by late London time, it was trading 0.4 percent higher at $1.4922, way above the earlier low of $1.4716.

Oil prices bounced back from earlier lows as stocks recouped earlier losses. Benchmark crude for June delivery was up 16 cents at $76.96 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.69 to $76.80 per barrel on Monday.

Earlier in Asia, stocks gave up much of their previous day’s advance.

Japan’s Nikkei 225 stock average fell 1.1 percent to 10,411.10 while South Korea’s Kospi dropped 0.4 percent and Australia’s S&P/ASX 200 shed 1.1 percent. Benchmarks in mainland China, Taiwan, India, and Singapore also slid, while Hong Kong’s Hang Seng index retreated 1.4 percent to 20,146.51.

Stocks in the Philippines bucked the regional trend, surging 3.9 percent as Sen. Benigno Aquino III, son of Philippine democracy icon Corazon Aquino, opened up a commanding lead in presidential elections after campaigning on an anti-graft platform.

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Associated Press Writer Alex Kennedy in Singapore contributed to this report.