Global stocks extended their comeback to a second day yesterday on relief over the European Union's bailout program for its weaker members.
Major indexes rose but not at the same fast pace as on Monday. Investors set aside some of their fears that problems in weaker European countries will disrupt the global economic recovery. Analysts say traders are again giving greater weight to the stronger economic picture in the U.S.
"We've taken the panic out of the market," said Paul Zemsky, head of asset allocation at ING Investment Management in New York. "In the U.S. market the fundamentals are clearly good."
The bailout helped reassure investors that European countries would act decisively to protect the euro. However several weaker countries will still have to make deep spending cuts to rebuild confidence in the euro, which could slow a recovery in Europe's economy.
The International Monetary Fund warned meanwhile that European public debt levels were at danger levels and had to be reduced while a series of top EU officials led a chorus of remarks that the public finances must be balanced.
At the start of yesterdays' trading in Asia, markets fell back and set the tone for a weak start in Europe as investors trimmed holdings after Monday's euphoria.
"The gains from the one-trillion-dollar bailout were short lived as speculators foresee tough cutbacks for the troubled European states," said Manoj Ladwa, senior trader at ETX Capital in London.
"The dollar rallied overnight as the debt problems in the eurozone and political uncertainty in the UK sent traders in search of a safe-haven currency," he added.
The euro, which jumped back above $1.30 on Monday before slipping again, continued weaker and was at $1.2715 in London trade, down from $1.2778 in New York late Monday.
Derek Halpenny of Bank of Tokyo-Mitsubishi said concerns about European public finances returned in force to the markets, with Spain and Portugal seen to be at risk after Greece.
Halpenny noted in particular the European Central Bank's decision to buy up government bonds, effectively helping eurozone states to borrow when it should be tightening up instead.
"The rescue package turned out to be bigger than expected," said Hideaki Inoue, a senior dealer at Mitsubishi UFJ-Trust and Banking Corp. "But worries still linger, leaving few people willing to buy the euro aggressively."
On the stock markets, London's benchmark FTSE 100 index of leading shares closed down 0.99 per cent at 5,334.21 points. In Paris, which jumped nearly 10 per cent Monday, the CAC 40 fell 0.73 percent at 3,693,20 points but in Frankfurt, the DAX rose 0.33 per cent to 6,037.71 points.
Dealers said that as well as doubts over the EU-IMF deal, the markets were also beginning to realise that if it did in fact work and governments cut back spending, then European growth rates could be weak for several years to come.
On Wall Street, the blue-chip Dow Jones Industrial Average dropped more than half a percentage point in early trade after gaining nearly four percent on Monday before steadying as investors bought into tech stocks.
The DJIA was up 0.37 per cent at around 1615 GMT with the tech-heavy Nasdaq Composite gained 0.81 per cent.
"The optimism from the one-trillion-dollar euro-area financial rescue package is dissipating as the focus shifts to the difficult fiscal changes that debt-ridden eurozone nations will have to implement to move toward long-term sustainability," Charles Schwab & Co. analysts said in a note to clients.
Patrick O'Hare, market analyst at Briefing.com, said markets were waking up to the reality "that trying to solve a sovereign debt problem by taking on more debt is a bit like a consumer trying to solve a debt problem by transferring debt balances to a credit card with a higher credit limit.
"That tactic buys some time but it does not change the fact that one still has a debt problem."
Earlier in Asia, Tokyo closed down 1.14 per cent and Hong Kong gave up 1.37 per cent.