Tuesday 22:10 BST. Traders hold steady as investors are steeled by mostly positive earnings, though still veered away from taking on substantial risk by the fallout from European fiscal difficulties.

The FTSE All-World equity index reversed its losses and was up 0.5 per cent, but the dollar bounced off near 10-week lows as its haven attraction trumps concerns about the US economy. The euro was also in retreat and US 2-year Treasury yields hit a new low.

Gains appear likely to continue: After the close there was an anticipated agreement by BP to sell $7bn in assets to Apache; that will give backbone to those cheering a potential return of the bid premium to shares. And Apple, which has been going through a rare spell as a laggard, reported stronger-than-expected earnings on the back of brisk sales of iPads and iPhone 4 devices.

But the trigger for the session’s early slide appeared to be news highlighting how the stretched budgets of many European nations, and the austerity drives designed to combat them, will place strains on financial systems and negatively affect the corporate sector.

The UK’s fiscal situation came into focus following a profit warning from UK-listed telecoms group Cable & Wireless Worldwide. That brought home to investors how the slashing of government spending can hurt company earnings. News that the UK government’s borrowing in June was the highest on record for that month only serves to highlight the extent of cuts to come.

In the US, the first substantially negative earnings report, from Goldman Sachs, knocked back sentiment early, as the S&P 500 opened nearly 1.5 per cent lower. However, growing revenues and earnings at IBM and Texas Instruments, plus earnings-forecast beating perormances by PepsiCo and UnitedHealth Group, attracted bargain seekers.

Even Goldman Sachs, still the leading trading franchise on Wall Street, was higher later in the session as bargain hunters swooped in. The S&P 500 index was up 1.1 per cent.

“The company reports we’ve had so far are inconsistent with the double dip concerns that the markets have been pricing in,” said Stuart Schweitzer, global markets strategist at JP Morgan Asset Management.

Yet many of the earnings reports contained notes of caution – notably forecast cuts by Johnson & Johnson and Tupperware, plus below-expectation business sales growth at IBM – that did little to dispel fears that the economy was slowing. Such is the worry about the US and global economy potentially slipping backwards, that some analysts see the Federal Reserve needing to consider further monetary stimuli.

Indeed, Mr Schweitzer cautioned: “The strength of corporate profits is what leads me to expect that business hiring and capital spending will improve in the coming months, but it’s not going to be an overnight recovery. There are just too many negatives out there.”

In addition, a poorly-received auction of three-month bills by Hungary showed investors are getting increasingly nervous about the stand-off between Budapest and the IMF/EU over the extent of the austerity package relating to the receipt of a €20bn loan. That has hurt the region’s banking stocks, which are seen having significant exposures to eastern european debt.

Sales today of debt by Ireland, Spain and Greece have gone fairly well, but then the ECB stands as a backstop for such “peripheral” sovereigns. A six-year UK gilt auction was more of a struggle. US Treasury bonds saw buying in spite of shares rallying after housing starts were said to slow 5 per cent in June (though permits for future potential building did offer some hope).

This only highlights the difficulties investors – and governments– know they face in trying to assess a patchwork global economy and thus the markets’ prospects in the medium term.

Just north of the border, the Canadian central bank raised interest rates for the second time in six weeks – from 0.5 per cent to 0.75 per cent – as it seeks to normalise policy as activity rebounds.

The move shows that areas of strength persist, a point highlighted today by the Asian Development Bank which, while acknowledging that issues such as the sovereign debt crisis had made the environment more uncertain, raised growth forecasts for most economies in the region.

At the same time, Australia and Brazil are struggling over whether to slow their growth or keep their foot on the accelerator. The Australian dollar was higher on speculation of another rate hike, while Brazil’s real was lower (and its stocks higher) after a report showing a more moderate pace of inflation growth led traders to conclude that another rate hike was not necessarily imminent.

New US housing data were also received with confusion. New construction was down 5 per cent June, leading homebuilding shares to initially tumble. But shares later rallied as markets focussed on a sub-data point showing permits for future building to be on the rise.

Asia. The FTSE Asia-Pacific index added 0.2 per cent, shrugging off worries about US growth and the poorly-received results overnight from IBM and TI. S&P 500 futures had fallen nearly 1 per cent after the bell in New York following those results, but by the time the Asian session drew to a close the contract had pared losses as investors in the region took a more phlegmatic view of corporate prospects.

Shanghai sported its second consecutive good advance, rising 2.2 per cent as traders welcomed signs of currency liberalisation by Beijing. Hong Kong climbed 0.9 per cent, though Tokyo fell 1.2 per cent as Japan played catch-up after being closed for a holiday on Monday.

Europe. Bourses initially responded to Wall Street’s rebound overnight and saw decent gains from the off. However, the austerity worries took their toll as the session progressed and falls accelerated after the Goldman earnings hit the wires.

The FTSE Eurofirst 300 was only fractionally higher even though miners did well. Banks, which were modestly higher as investors reasoned that the outcome of the eurozone stress tests due on Friday will restore confidence to the sector, faltered later on.

The FTSE 100 in London was down 0.2 per cent, led lower by telecoms.

Forex. The dollar rebounded as equities slid. The dollar index, which measures the greenback against a basket of its peers, was up 0.3 per cent.

The euro had earlier reclaimed the $1.30 mark, but the renewed fiscal worries, profit taking and haven trades left the single currency down 0.4 per cent at $1.2891.

Notably, the euro seemed to ignore early rumours, based on reports in Spanish media, that all of Spain’s caja savings banks passed the stress tests. That news, if true, could go either way with traders. Either it means that Spain’s troubled lenders are healthier than expected, or that the stress tests were not stressful enough.

Debt. The market faced a deluge of sales, with Spain, Ireland, Greece and the UK auctioning debt of various duration. Eurozone auctions had been considered pretty successful of late, so any disappointing sale could have hit sentiment.

Spain, for example, sold €4.3bn of 12-month bills and €1.7bn of 18-month bills, and though the bid-to-cover ratios were slightly lower than seen for an auction last month, so were the yields demanded, a sign of easing investor stress. Spanish 10-year benchmark yields are down 7 basis points at 4.33 per cent.

US Treasuries enjoyed demand as traders seek havens. The 10-year yield is down 1 basis point at 2.95 per cent, while the 2-year note earlier hit a new all-time low of 0.5764 per cent. In late trading it had flattened out to 0.5845 per cent.

Commodities. The complex managed a stoic performance given the bond market’s flight from risk. This may partly be the result of the complex’s correlation to sentiment emerging from China, where stocks had another good day. Copper was up 2.7 per cent at $3.01 a pound in New York trading. Oil reversed an early slide, rising 1.2 per cent to $77.44 a barrel, helping to push the Reuters-Jefferies CRB index up 0.1 per cent.

Gold was up 0.8 per cent at $1,191 an ounce, having hit a fresh two-month intra-day low of $1,175.

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