By PAN PYLAS
LONDON - European stock markets were steady today after sizable falls in Asia earlier as investors continued to worry that a global economic recovery later this year - the main driver behind the rally since March - could be choked off at birth by rising interest rates and oil prices.
In Europe, the FTSE 100 index of leading British shares was down only 1.71 points at 4,276.75 while France's CAC-40 index fell 3.20 points, or 0.1 percent, to 3,157.94. Germany's DAX was bucking the trend somewhat, trading 7.44 points, or 0.2 percent, higher at 4,807.42.
Earlier in Asia, Japan's benchmark Nikkei 225 stock average fell 137.13 points, or 1.4 percent, to 9,703.72, and Hong Kong's Hang Seng dropped 307.94, or 1.7 percent, to 17,776.66.
"Asian equity markets put in a mixed performance with equities generally unsettled by higher oil prices and upward pressure on long-term interest rates," said Neil Mackinnon, chief economist at ECU Group.
Interest rates, particularly on U.S. government bonds have been rising steadily over recent weeks on expectations that the U.S. Federal Reserve will raise borrowing costs sooner than previously anticipated. Meanwhile, oil prices have more than doubled over the past couple of months on hopes that a global economic rebound will boost demand for crude.
The stock market rally since March had been fueled by hopes that the U.S. economy will recover from recession sooner than anticipated. As equities usually start rising 6 to 9 months before actual recovery emerges in the official data, this suggests investors believed the massive sell-off in markets during the most acute phase of the financial crisis was overdone. Some of the world's major equity indexes are now in positive territory for 2009.
That optimism has dissipated in recent days, and analysts say investors need clearer evidence that the world economy and company earnings are recovering so that current stock valuations make sense. In March, many investors saw valuations around the world as particularly cheap and started buying into the market.
"There appears to be a creeping realization that equity markets had diverged with reality over recent months," said Mitul Kotecha, an analyst at Calyon Credit Agricole.
"Some justification for equity gains is evident from less negative economic data, but going forward less negative news will not maintain positive momentum - instead, it will need positive as opposed to less negative to keep the rally going and it is difficult to see where this will come from," he added.
Wall Street is expected to open modestly higher later following a subdued performance on Wednesday. Dow futures were up 19 points, or 0.2 percent, at 8,456 while the broader Standard & Poor's 500 futures were up 2.4 points, or 0.3 percent, at 907.70.
Elsewhere in Asia, South Korea's Kospi lost 1.1 percent, while Australia's key index was down 0.3 percent and Taiwan's benchmark pulled back 0.8 percent.
But Shanghai shares defied the losses, with the benchmark climbing 1.6 percent to a 10-month high, as the World Bank raised its China 2009 economic growth forecast from 6.5 percent to 7.2 percent and the country's premier said the economy was showing "positive changes."
The World Bank said Beijing's stimulus-driven investment boom would help shield the world's third-largest economy from the downturn, but cautioned it was too soon to say a sustained recovery was on the way.
China's ability to prosper as overseas economies slump has been a popular theme among investors, helping drive mainland and Hong Kong shares - as well as certain commodities - to huge gains in recent months.
Oil prices lingered near $71 a barrel today, with benchmark crude for July delivery up 46 cents to $71.49 a barrel.
The dollar was down 0.1 percent at 95.79 while the euro declined 0.3 percent to $1.3935.