Wednesday 21.25 BST: A recovery in risky assets is running out of steam, as optimism about stronger company earnings wanes and fears that growth may ease are on the rise.

The FTSE All-World stock index fell 0.2 per cent from its highest point since mid-May. After a rally in which risky assets like stocks and the euro have recovered about half of what was lost from peak levels in March and April, bullish traders are struggling to push them any further.

Sparked by a decline in US demand for durable goods, crude oil is tumbling, Wall Street’s S&P 500 index is 0.7 per cent lower and the Eurofirst 300 index is off after touching a five-week high, down 0.3 per cent. The euro has been up-and-down all day around the $1.30 level.

The currency market is also avoiding risk, following reports that inflation would moderate in previously fast-growing economies Australia and South Africa. The safe-haven yen is higher, as is the Swiss franc, against the US dollar.

“Risk appetite has already improved a lot from the worst part of the cycle. After that, it will be much more of a sideways move for some time,” said John Higgins, senior market economist at Capital Economics.

Earlier, catalyst-hungry bulls found a solid peg in China. Zhang Tao, one of China’s top central bank economists, pledged to keep monetary policy stable for the foreseeable future. That followed Tuesday’s central bank outlook for the rest of the year, which said growth would slow but not double dip. Asian shares and key industrial metal copper gained, and safe-haven Japanese government bonds were sold off.

But industrial companies offered traders reason to holster that optimism. ArcelorMittal, the world’s largest steel-maker, said that it had reversed its losses in the second quarter, but warned that weaker Chinese demand for materials could knock its earnings later this year. US steel-makers US Steel and AK Steel late on Tuesday also reduced their forecasts for the year when they reported earnings.

Forecast-beating corporate earnings have also lost their lustre, as investors focus more on sales forecasts than last quarter’s profits. A surprisingly large drop in consumer confidence on Tuesday added to fears that final sales growth may be slowing. Economists at Credit Suisse said that with deflationary expectations rising, US consumer spending could slow to just 1.2 per cent annual growth.

Europe. European shares are stalled after opening higher, as they try to extend five-week highs reached on Tuesday. The Eurofirst 300 index was down by 0.3 per cent.

Banks are competing with industrial producers for shares’ direction. European financials are up about 0.7 per cent, while chemical- and steel-makers are down 1.2 per cent, following ArcelorMittal’s warnings about the third quarter. The UK’s FTSE 100 index was down 0.9 per cent, and Germany’s Dax was down 0.5 per cent.

Spain’s Ibex 35 index was flat. The country’s second-biggest bank, BBVA, reported that its second quarter profits fell 17 per cent.

Asia. The FTSE Asia-Pacific index was up 1 per cent, led by the 2.7 per cent gain for the Nikkei 225 after the yen eased off near-2010 highs earlier on Tuesday and Canon said second-quarter profits quadrupled.

Chinese stocks neared a two-month high. Shanghai’s composite index jumped 2.3 per cent, shrugging off worries about its banking system, in which almost one-fifth of loans to local governments are said to have gone bad, and focusing on growth hopes.

Hong Kong’s Hang Seng index was up by 0.6 per cent and Australia’s S&P/ASX 200 was higher by 0.7 per cent. Mumbai’s Sensex lagged again, down by 0.7 per cent.

Forex. Risk appetite is declining after economies reported moderating growth. The euro is flat against the dollar at $1.2996. The yen is higher, adding 0.5 per cent against the greenback, to Y87.47.

Australia’s price growth has slowed to a three-year low, which sent the Aussie tumbling 1 per cent against the US dollar to $0.8937, easing off 10-week highs. The South African rand, following a similar report that local inflation was slowing, is lower by 0.8 per cent to 11.89 to the yen.

A dovish outlook by Mervyn King, governor of the Bank of England, weighed on the pound. Mr King predicted that inflation would fall back in line, and did not require a policy adjustment. Sterling pared its gains against the US dollar, and is flat at $1.5594.

Debt. Ten-year US Treasury bonds are down 5 basis points to 3 per cent. Ten-year German euro Bond yields are down 2 basis points to 2.75 per cent.

Treasury yields were higher on Tuesday, but an auction of two-year notes was strongly bid, suggesting that while trading was soft, tepid risk appetite is struggling to push yields much further.

Greek 2-year bond yields fell 13 basis points to 10 per cent. But Spanish sovereign debt yields are higher, paring a post-stress test dip.

Since the CEBS bank stress tests Spanish yields are down more than 20 basis points, to 4.14 per cent on Tuesday. The tests found the country’s banks needed less than €1.5bn of fresh capital to retain sufficient tier one ratios in the event of a crisis, well within its government’s reach to provide. Its credit-default swap spreads rose earlier, presaging the rising rates.

Commodities. Crude broke its tight range on Tuesday, falling more than 1.5 per cent, and it is struggling today in spite of the equity gains. US crude is down 0.9 per cent at $76.82. The US government reported a jump in US crude inventories to above-average for this time of year, casting further doubt on the economic recovery.

Copper was up 1 per cent near $3.24 a pound in electronic Nymex trading following China’s pledge of monetary stability. Gold was up 0.2 per cent, at $1,164 an ounce, after the market was sharply sold off just before the US open.

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