Markets' post-Fed relief rally loses steam

LONDON - A Federal Reserve pledge to keep extremely low interest rates for two more years calmed investors' jitters a bit Wednesday, but underlying fears about the global economy caused Europe's stock market rally to run out of steam.

The Fed's surprise announcement Tuesday that it would likely keep its Fed funds rate at near zero percent through 2013 to help the ailing U.S. economy fueled a late Wall Street surge — the Dow Jones industrial average rallied 6 percent just in the final hour of trading, one of the biggest turnarounds ever seen.

That continued into Asian and European trading sessions Wednesday, although traders remained nervous after the market turmoil of recent weeks, which has sent many global markets officially into bear market territory — falling 20 percent from recent peaks.

"So far, panic has eased but fear remains," said Kit Juckes, an analyst at Societe Generale.

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In Europe, the FTSE 100 index of leading British shares was down 0.7 percent at 5,124 while Germany's DAX fell 1 percent to 5,854. The CAC-40 in France was 1.9 percent lower at 3,117.

Wall Street was poised to give up a large chunk of Tuesday's late gains — Dow futures were down 1.6 percent at 11,018 while the broader Standard & Poor's 500 futures fell an equivalent rate to 1,153.

Worries over the U.S. economic recovery have been building over the past weeks, ever since the government revealed that the world's largest economy has been growing far more weakly in the first half of 2011 than economists expected.

In a reversal, economists now believe there is a greater chance of another U.S. recession.

U.S. economic data in the next few weeks has the potential to prompt new jitters.

"Given the tension that remains in the market, traders need to be wary of early bouts of profit taking, which is likely to keep rallies choppy," said Joshua Raymond, chief market strategist at City Index.

The other major market concern is Europe's debt crisis. Investors have grown increasingly worried that Italy and Spain could become the next European countries to have trouble repaying their debts. Greece, Ireland and Portugal have already received bailout loans because of Europe's 21-month-old debt crisis.

The fears have pushed investors to shun Spanish and Italian bonds, which have led to higher yields and even higher borrowing costs for the two countries.

The European Central Bank stepped in Monday and began buying billions of euros worth of their bonds. The move has helped to lower yields on Spanish and Italian bonds to around the 5 percent mark from over 6 percent. The two countries' borrowing costs, though high compared to Germany and other euro countries, are considered manageable for now.

Earlier in Asia, the Shanghai Composite Index rose 0.9 percent to 2,549.18 and the smaller Shenzhen Composite Index gained 1.4 percent. Indexes in Taiwan and India also gained. Hong Kong's Hang Seng jumped 2.3 percent to 19,783.67.

Japanese stocks underperformed somewhat as investors continued to fret over the export-sapping appreciation of the yen.

Japan's Nikkei 225 index climbed 1.1 percent to close at 9,038.74 as the dollar headed near to post World War II lows against the yen. By mid-afternoon London time, the dollar was 0.9 percent lower at 76.40 yen, not far above the level last week that prompted the Bank of Japan to intervene in the markets.

Meanwhile, the euro was down 0.8 percent at $1.4246.

In the oil markets, prices recovered following recent hefty losses. Benchmark oil for September delivery was up $2.73 to $82.03 a barrel in electronic trading on the New York Mercantile Exchange.