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Shares recover ground after steep falls Share prices in see-saw back to losses
(about 2 hours later)
Shares have recovered some ground from Thursday's steep losses, which came after the US Fed said it could scale back its stimulus programme. US and European share markets have returned to losses, but at a shallower rate than those seen on Thursday.
The main share indexes in the UK, Germany and France recorded gains of up to 1% in morning trade, but then trimmed gains in the afternoon. Shares in the UK, France and Germany slumped in late trading after Wall Street reopened, with the FTSE 100 ending Friday down 0.7%, the Paris Cac 40 1.1% and Germany's Dax 1.8%.
Earlier, Asian stocks had fallen sharply before recovering. Oil prices also fell, with Brent crude down 1.8% to just over $100 a barrel.
Wall Street also helped halt the rout when the markets opened (13:30 GMT), registering slight gains. The sharpest falls came after US Fed said it could scale back its stimulus programme.
On Thursday, leading US shares had seen their biggest fall of the year so far - with the Dow Jones dropping 2.3%. That sent the Dow Jones to close down 2.3% on Thursday, its biggest fall of the year.
China worriesChina worries
The Fed has been trying to support the weak US economy by buying bonds at a rate of $85bn (£54bn) a month, under a policy known as quantitative easing (QE).The Fed has been trying to support the weak US economy by buying bonds at a rate of $85bn (£54bn) a month, under a policy known as quantitative easing (QE).
However, on Wednesday, Fed chairman Ben Bernanke said that if the US economy continued to show signs of improvement then the central bank could start to slow down its bond purchases as early as this year, and end the programme next year. However, late on Wednesday, Fed chairman Ben Bernanke said that if the US economy continued to show signs of improvement then the central bank could start to slow down its bond purchases as early as this year, and end the programme next year.
The bond-buying programme has been seen as a key factor behind the rise in stock markets in recent months, as the cash proceeds from the bond purchases flood through the economy and keep long-term interest rates low.The bond-buying programme has been seen as a key factor behind the rise in stock markets in recent months, as the cash proceeds from the bond purchases flood through the economy and keep long-term interest rates low.
Another factor that spooked markets was news of record high borrowing costs in China this week, raising fears of a Chinese credit crunch and a stalling of the world's growth engine.Another factor that spooked markets was news of record high borrowing costs in China this week, raising fears of a Chinese credit crunch and a stalling of the world's growth engine.
Markets remained under pressure on Friday, but some analysts said the falls seen the previous day had been an overreaction. Markets remained under pressure on Friday, but some analysts said the falls seen the previous day had been an overreaction, with markets rebounding somewhat during morning trading in Europe.
Neil Marsh, strategist at Newedge, said: "We've had a bit of a correction, and even now I think the correction looks overdone, so I am still fairly bullish."Neil Marsh, strategist at Newedge, said: "We've had a bit of a correction, and even now I think the correction looks overdone, so I am still fairly bullish."
Commodities also recovered slightly from their sharp falls in the previous trading session. However, the negative sentiment returned in the closing hours.
And the gold price halted recent slides, rising to $1,295.25 an ounce, up from $1,292.50. Brent crude oil ticked up 48 cents to $102.63. Returns
Bonds were also largely steady. Behind the bearish tone was a rise in long-term interest rates, as markets continue to price in expectations that the Fed will start raising short-term US interest rates sooner than previously thought.
'Force-fed steroids' The 10-year yield on US Treasuries - the benchmark for the Federal government's long-term cost of borrowing - rose from 2.41% to 2.48%. In early May it stood at less than 1.7%.
The excess liquidity in the US has meant a lot of funds have been flowing into emerging markets, especially in Asia. The prospect of higher returns in the US dragged the dollar higher against most other currencies, up 0.8% against the euro, 0.7% against sterling and 0.3% against the yen.
"Asia has benefited from US capital inflows, partly in relation to QE," said Mitul Kotecha, from Credit Agricole CIB. It also drove long-term borrowing costs marginally higher in other countries, including the UK and eurozone.
"It has been force-fed with steroids, and now that the steroids are going to be pulled back what will happen is a period of transitional volatility that can continue through summer." Commodities prices had a more mixed day, as the negative sentiment from the US was tempered by relief that the apparent stress in the banking system in China - the dominant buyer of many of the world's raw materials - had eased somewhat on Friday.
The dollar slipped back a little on Friday from its recent two-week highs against a basket of currencies but remains high.
The sharp drop in the value of the yen against the dollar over the past couple of days boosted Japan's stock market, with the Nikkei ending up 1.7% higher.
A weak yen is good news for Japanese exporters as it makes their goods cheaper overseas and boosts profits that are repatriated back home.
Elsewhere in Asia, South Korea's main index dropped 1.5%, Australia's lost 0.4%, while Hong Kong and Shanghai indexes pared earlier losses to end the day down 0.5% and 0.2% respectively.