Global equity and commodity prices enjoyed a steadier session after the previous day’s sharp sell-off, although the mood in the markets remained fragile as worries about the eurozone and China lingered.

The dollar eased back and Treasury bonds edged higher after tame inflation figures and weak housing data in the US appeared to reinforce the case for the Federal Reserve’s expansion of its quantitative easing policy, or “QE2”.

But uncertainty over how the Irish debt crisis would play out remained the chief thorn in the side of market participants. Ireland has agreed to work with the European Union and the International Monetary Fund to shore up its ailing banking sector, heightening expectations that Dublin will soon bow to eurozone pressure to accept some form of bail-out.

The yield on the 10-year Irish government bond fell 11 basis points to 8.35 per cent, narrowing its spread over German Bunds by 5bp to 557bp, while on the currency markets, the euro climbed off a seven-week low against the dollar.

But the lack of a concrete resolution to the Irish situation, along with news that clearing house LCH Clearnet had raised its margin requirement for trading Irish debt for the second time in a week, kept market participants nervous.

“That the situation is becoming increasingly unsustainable is visible from the growing contagion from European creditors across other assets,” said Lena Komileva, head of G7 market economics at Tullett Prebon.

“The broadening risk reversion in financial markets in recent days has written off the reflationary effects from the Fed’s QE2 as the market prepares for a major credit event in Ireland or a major knock-on effect on Portugal.”

Indeed, Portugal’s cost of short-term borrowing soared more than 150 basis points at a Treasury bill auction on Wednesday.

Meanwhile, Chinese equity markets suffered another steep fall after Wen Jiabao, the country’s premier, said the government was developing measures to rein in inflation. The Shanghai Composite index fell 1.9 per cent, taking its slide over the past four sessions to nearly 11 per cent.

But in contrast to China and other emerging market economies, the latest data from the US appeared to suggest that deflation was a bigger concern.

Headline US consumer prices rose by 0.2 per cent in October, less than economists had expected. The core CPI, which excludes volatile food and energy prices, was unchanged for a third successive month, taking the annual increase down to 0.6 per cent, the lowest since records began.

“The Fed will take some perverse comfort in these figures as vindicating their recent foray into a new round of QE – though they will probably also fret that the outside risk of outright deflation is looking a little less outside than it did,” said Rob Carnell, chief international economist at ING. “Critics of the Fed’s latest QE exercise may have to bite their tongues.”

Meanwhile, further evidence of the problems facing the US economy – and hence further justification of the Fed’s QE2 policy – came from data showing that housing starts had tumbled by 11.7 per cent last month.

However, Gabriel Stein at Lombard Street Research said that the high level of negative equity in the US housing market meant many householders could not take advantage of any lower interest rates engendered by QE2 to remortgage their homes.

“The Fed’s QE2 will not aid homeowners and housing is likely to remain weak for the foreseeable future,” Mr Stein said.

The yield on the 10-year US Treasury bond was up 3 basis points at 2.87 per cent at the end of the day in New York. Treasury yields have risen sharply since the Fed launched QE2 this month.

Wall Street drew scant comfort from the inflation data, as the S&P 500 inched up by less than 0.1 per cent, having tumbled 1.6 per cent on Tuesday. The FTSE Eurofirst 300 index rebounded 0.5 per cent.

In commodities, the Reuters-Jefferies CRB index fell 0.3 per cent as oil prices tumbled nearly $2 to below $81. Copper bounced off its lowest for nearly two months, while gold fell back a bit to $1,334 an ounce as the dollar pared its losses during US trading.

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