Positive news on the US housing market on Tuesday fuelled fresh hopes of economic stabilisation, helping to keep equity markets on an even keel after Monday’s strong gains.

Commodity prices pared early losses as an early bout of profit-taking ran out of steam, while the dollar held near its lowest level of the year against the euro.

US pending home sales rose by 6.7 per cent in April – the biggest monthly gain in more than seven years and the fourth increase in five months.

“More fuel for the risk trade, which is cautiously positive after Monday’s large gains took equity indices to key resistance levels,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Paul Dales at Capital Economics said if the rise in pending home sales was fully reflected in existing home sales numbers, the latter would soon rise back to about 5.1m – the level seen before the collapse of Lehman Brothers in September last year.

“Nevertheless, even if existing home sales were to rise to 5.1m, they would still be 30 per cent below their peak,” Mr Dales said.

“Accordingly, even if activity is finding a floor, it is at staggeringly low levels.”

US and European equities struggled to build on the previous day’s gains – but managed to rally off early lows. In New York, the S&P 500 closed up 0.2 per cent, while the pan-European FTSE Eurofirst 300 index ended virtually flat.

In Tokyo, the Nikkei 225 Average managed a 0.3 per cent rise to a fresh eight-month high, although Hong Kong snapped a three-day run of gains to end 2.6 per cent lower.

The more positive tone to recent US economic data – most notably on consumer confidence and manufacturing activity – have prompted some in the markets to speculate that the recession might be almost over.

Marc Pado, market strategist at Cantor Fitzgerald, said that in six months’ time, the official declaration of the end of the recession could focus on the month of May.

Mr Pado pointed to Monday’s manufacturing report from the US Institute for Supply Management showing that new orders had grown in May.

“This is the first time we’ve seen a number showing growth in the index since November 2007 – the month before the recession began,” he said.

Mr Pado also noted a “stunning increase” of 0.8 per cent in construction spending in April.

Others, however, were less optimistic. David Rosenberg, chief economist and strategist at Gluskin Sheff, acknowledged the good news from the new orders data but noted that the employment index of the ISM report had eased to 34.3 – compared with 48.7 when the recession began.

“A fascinating way to end the recession – ISM employment 14 points lower than when the downturn officially began,” Mr Rosenberg said.

However, the markets do appear to have been pricing in a rosier outlook for the economy. The Baltic Dry index of freight costs – a widely-watched barometer of activity – has climbed for 22 days in a row to its highest since September.

Meanwhile, the gap between two-year and 10-year US government bond yields touched a record 277 basis points, before flattening sharply. The yield gap tends to widen as growth and inflation expectations strengthen. Treasury inflation-protected securities moved to price in expectations for inflation to rise above 2 per cent over the next 10 years for the first time since September.

The 10-year Treasury yield dropped 8bp to 3.63 per cent as the market tracked movements in equities. In Europe, the 10-year Bund yield was 2bp lower at 3.65 per cent.

Commodity prices eased only moderately following Monday’s hefty gains.

Oil slipped just 3 cents to $68.55, while copper edged down 0.8 per cent – but held above $5,000 a tonne as the softer dollar provided support.

Gold rose 0.5 per cent as it continued to advance towards the $1,000 an ounce level.

In the currency markets, the dollar fell 1.2 per cent against the euro and 0.9 per cent against sterling. Commodity currencies such as the Australian dollar performed even better.

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