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European stock markets have stabilised after the European Central Bank
announced its intention to buy up government debt.
Spanish and Italian markets jumped in early trading, while all major European
indexes gained ground. The yields on Madrid and Rome bonds also fell.
After Asian shares fell overnight, there had been fears that European markets
would follow suit.
But in London and Paris, the FTSE and Cac indexes were up about 1%.
The Spanish and Italian markets both rose by more than 2% as traders reported
that the ECB had started buying government bonds from both countries.
The yield on Spanish 10-year bonds - an indication of the risk associated with
lending Spain money - fell dramatically from more than 6% to about 5.2%. Yields
on Italian bonds fell by a similar amount.
Earlier, Asian indexes had lost ground as investors worried about the impact of
rating agency Standard and Poor's decision to downgrade the US on Friday night.
Japan's Nikkei and South Korea's Kospi indexes lost 2.2%, while Hong Kong's
Hang Seng was down 3.8%.
Last week saw trillions of dollars wiped from the value of global markets, with
the Dax losing about 13% of its value, the FTSE 100 dropping 10% and the Dow
ending the week 5.8% lower.
More wobbles?
Continue reading the main story
View from the trading floor
image of Joe Lynam Joe Lynam BBC News, at BGC Partners
Most of us drag ourselves unwillingly out of bed on a Monday morning. But one
gets a sense with City traders that they throw back the duvet on days like
this.
There was an acute air of anticipation on the trading floor as some of the
brightest and wealthiest in London held their collective breath to see what the
market would open at.
Fifteen minutes before the opening bell at 8am saw the testosterone levels rise
- manifested by increased shouting and standing up (as if one's trade would be
more effective on one's feet).
When the FTSE 100 started to rise after initially tanking, the shouting and
posturing intensified.
Whether that intensity can be sustained over the course of this crisis is - as
ever - the 'known unknown'.
Analysts warned that markets would remain volatile in coming weeks, despite the
G7 group of developed countries and the ECB vowing to support financial
stability.
On Sunday, the ECB indicated that it would start buying eurozone bonds, hoping
to instil confidence that some of its biggest economies would not default on
their debt obligations.
Analysts were mixed in their reaction to the move, and said the markets would
be hoping to see more action in Europe.
"Clearly, the S&P downgrade is a very symbolic and historic event," said Paul
Sheard of Nomura. "But really the epicentre of this crisis, unlike 2008, is
very much in the eurozone."
"So I think the markets will be focusing very much on what the euro area
policymakers will do over the coming weeks."
In a separate statement, the G7 group of developed countries said members were
"determined to react in a co-ordinated manner" to preserve financial stability.
Knock-on effects
Start Quote
Italy's potential financing requirements on its own would exhaust the resource
of the EFSF, based on its current size, if investors were to shun Italy
altogether. That is why investors see any purchases by the European Central
Bank of Spanish and Italian debt as - at best - sticking plaster
image of Robert Peston Robert Peston Business editor, BBC News
Peston: How ECB failed to reassure investors
S&P's downgrade of US debt has also underminded investors' confidence.
"The ratings downgrade has been an unprecedented event," said Alvin Liew of UOB
Bank in Singapore.
Standard & Poor's cut the US's top-notch AAA rating for the first time, citing
concerns about the size of the country's budget deficit and the acrimonious and
protracted battle in Congress to raise the country's debt ceiling at the
eleventh hour. It has graded the US at AA+.
The fear for many investors is that the US economy will slow further, and even
enter a double-dip recession.
This in turn would hurt Asia, which relies on the US, the world's biggest
economy, to buy billions of dollars of exports every month.
Gold standard
Fears of renewed global slowdown were reflected in the price of gold and oil.
Gold, which is seen as a safe investment in times of economic uncertainty,
jumped to a new record high of $1,704 an ounce on increased demand.
Meanwhile the price of oil slipped further, reflecting concerns that weak
global growth could lead to a fall in demand. US light crude fell 2.8% to
$84.44 a barrel, while Brent crude lost 2.4% to $106.71.
"There are few places you can obviously hide," said Greg Gibbs of RBS in
Sydney. "And the ones that you can hide in are doing very well. Gold is the
beneficiary because there is no central bank to sell it."