European shares fell for a second straight day and the euro halted its recent rally, as weak German retail sales and poor earnings at its biggest bank added to investors' nerves after a shock fourth quarter contraction in the U.S. economy.
Data on Wednesday showed US GDP slipped back 0.1%, though the country's central bank, the Federal Reserve, indicated the pullback was likely to be brief as it repeated its pledge to continue providing support.
European shares, which have surged 3.7% this month, took their biggest daily hit of the year on Wednesday, and a plunge in German retail sales, stagnant French consumer spending and a huge quarterly loss at Deutsche Bank dashed hopes of a quick rebound.
The mood blackened through the morning, leaving London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX down 0.3 to 0.6% by 1015 GMT. The MSCI world share index was down 0.1% despite shares in Asia posting modest gains.
"Perhaps the German retail sales have contributed a little bit, but we knew that Q4 was weak, so I would it attribute it more to earnings news," said Chris Scicluna, an economist at Daiwa Capital Markets.
"The Deutsche Bank loss does look to be on the sizable side. There has clearly been some mismatch between financial markets and the real economy so that does lend itself to a bit of a pullback."
In the currency market, the German jitters also put the euro under pressure and halted its recent 4% rally.
It had started to show signs of stabilisation by mid-morning but remained well short of Wednesday's 14-month high of $1.3588 at $1.3560. The Federal Reserve's promise of continued support was widely expected to mitigate the fall, however, by keeping downward pressure on the dollar.
Evidence of that pull was seen as the dollar slipped 0.2% against the yen to 90.88 yen, having hit its strongest level since 2010 on Wednesday. Market focus now turns to Friday's monthly U.S. employment report.
Pull-back
The nervy market atmosphere also pushed up Spanish and Italian government bond yields as some investors switched from higher-yielding debt into German Bunds.
Spanish 10-year yields rose 10 basis points on the day to 5.31%, while equivalent Italian debt rose 10 bps to 4.38%.
German Bund futures were half a point higher, spurred on by the Fed's determination to maintain its policy of stimulus for the U.S. economy.
The downbeat European mood also began to creep into commodities markets, though investors seemed broadly happy to stick with the bigger picture view that the global economy is gradually regaining strength.
Risky assets such as equities, commodities, and high-yield debt have risen sharply in the past six months as growth in emerging economies like China has picked up and fears of a collapse of the euro have been calmed by the European Central Bank.
Spot gold drifted down to $1,675 an ounce, having hit a one-week high on Wednesday, while oil prices inched down 23 cents to just under $115 per barrel, still well above their starting price this year of $110 a barrel.
And there was no sign of weakness in growth-attuned copper as it marched to its highest level since October.
"We are still quite confident about a Chinese copper demand recovery in the first half, and we have seen evidence of pent-up demand, so the downside risk is limited," said Henry Liu, head of commodity research at Mirae Asset Securities in Hong Kong.
"But exceeding $8,500 this year might be a challenge, because domestic inventories are quite high," he added.
