london 09 05, 2012, 20:00 IST
The euro and European stocks rose while Spanish and Italian bonds yields fell on Wednesday after a media report that the European Central Bank planned to buy unlimited amounts of short-term debt to ease the region's financial crisis.
But stocks on Wall Street opened virtually unchanged as investors awaited more clarity on the purchasing plans.
Markets have been expecting ECB President Mario Draghi to unveil a bold plan at a policy meeting on Thursday, and the report, which said any bond purchases would be offset in money markets to sterilise or limit the inflationary impact, came as scepticism had been growing over the scale of the programme.
"I think the market saw the word 'unlimited' and jumped before realising that the ECB would not expand its balance sheet as it would sterilise all its purchases, and thus this was not the kind of aggressive monetary expansion that FX traders were looking for," said Boris Schlossberg, managing director of FX Strategy at BK Asset Management in New York.
The single currency, which had been down 0.15 percent at $1.2550, jumped to $1.26 after the report, closer to Friday's two-month peak of $1.26378.
European shares initially extended their gains on the report before settling up 0.2 percent at 1081.15 points, though the blue-chip Euro STOXX 50 index was up 0.6 percent at 2451.25 points.
"The ECB's bond buying plan is welcome, but you can't wax a car and hope it fixes the engine. Europe needs structural changes," said Manish Singh at Crossbridge Capital in a note.
Wariness over the ECB plans was in evidence on Wall Street, where the Dow Jones industrial average gained just 0.07 percent at the start of trading to 13,045, while the broader Standard & Poor's 500 Index dropped 0.02 percent to 1,404.64 points.
The growing likelihood of ECB action to ease the current stresses in the European debt market had already curtailed demand for safe-haven German bonds at an auction of new 10-year paper earlier in the day.
The German Finance Agency, which managed the debt sale, only received bids from investors worth 3.93 billion euros for the 5 billion of bonds it wanted to sell.
Analysts said demand might have been affected by the heavy supply elsewhere in the euro zone as the Netherlands was selling a three-year dollar-denominated bond, while triple-A rated Austria also sold bonds on Tuesday.
"(The auction) probably reflects the sheer volume of competing 10-year core supply both last week and this week, and of course the ECB event risk," said Credit Agricole rate strategist Peter Chatwell.
GROWTH GRIM
Beyond the ECB plans, investors were also looking at the implications of a slowdown in U.S. factory activity during August for Friday's crucial August nonfarm payrolls report.
A weaker-than-expected jobs number could bolster expectations of more quantitative easing by the Federal Reserve, perhaps later this month.
The slowdown at U.S. factories came after a spate of similar business surveys found activity easing at manufacturing and service sector companies across Asia and Europe.
The latest being the Markit composite Purchasing Manager's Index (PMI) for August, which posted its seventh month of contraction. The index fell to 46.3, down from an initial estimate of 46.6 and below July's 46.5.
"The final August PMI came in only slightly below its earlier flash estimate, leaving the euro zone economy on course to fall back into technical recession in the third quarter," said Rob Dobson, senior economist at data compiler Markit.
Retail sales in the euro zone also ended a two-month run of gains in July when volumes fell 0.2 percent as shoppers in the 17-nation currency area held back spending on food, drink and increasingly expensive fuel.
A Reuters poll published last month predicted the bloc would contract 0.2 percent in the three months to September, but Dobson said the latest PMI suggested the downturn could be far worse, with a contraction of 0.5-0.6 percent.
COMMODITIES SLIDE
The business surveys have added weight to growing fears in the commodity markets that demand is set to wane.
The prices of iron ore and steel have fallen dramatically on signs of slowing activity in China, though the slowdown has renewed hopes for central bank policy easing.
Iron ore prices, which have dropped 36 percent since early July, were below $90 a tonne, their weakest level since October 2009.
Steel futures hit an all-time low on the Shanghai Futures Exchange, with further falls expected.
In oil markets the growth worries pushed Brent crude under $114 a barrel on Wednesday, and U.S. crude futures slid 15 cents to $95.15.
Gold, which would benefit if lower growth prompts central banks into action, edged down 0.2 percent to $1,690.70 an ounce but is still trading near a six-month high.
