World stocks recoup losses, debt fears remain

World stocks bounced back from their previous session's trouncing on Tuesday but debt woes on both sides of the Atlantic and new signals from China on inflation dangers weighed on markets.

Wall Street looked set open higher, lifted by better than expected first quarter earnings from investment banking bellwether Goldman Sachs, which nonetheless fell 72%.

Greece sold 1.6 billion euros of three-month debt, but was forced to pay more than 4%, underlining growing unease in the market over a potential restructuring.

The dollar was 0.4% weaker against a basket of major currencies after climbing on Monday as investors engineered a classic rush to safety even as Standard & Poor's threatened to downgrade US debt.

European stocks bounced back, but only in the context of having fallen nearly 2% on Monday as the investor mood remained cautious. Japan's Nikkei closed down nearly 1.3%.

S&P stirred up investor concerns on Monday when it changed its outlook on the United States to negative from stable, threatening the future of its prized AAA credit rating.

The threat brings into focus the huge US budget deficit and the difficulty that Washington has in paring it down. The deficit is a key element in the global imbalances that currently worry many investors and policymakers.

There was no direct reaction to the S&P move on Tuesday from Beijing, which -- in counterpoint -- holds vast reserves of US Treasuries, though the head of China's central bank said the country should diversify investments as its some USD 3 trillion of foreign exchange holdings had grown too large.

Another Chinese ratesetter said inflation pressures gave further scope for a rise in banks' reserve requirements following seven hikes -- together with four increases in benchmark interest rates -- since last October.

"Discussions on the US losing its AAA-status have been active for two years, if not longer. S&P's move might have been a jolt, but should not really be a true surprise," said David Watt, senior currency strategist at RBC Dominion Securities.

Equity investors, meanwhile, focused on the earnings season.

In Europe, there was some boost from LVMH and Burberry, which both beat consensus forecasts.

The FTSEurofirst 300 was up three quarters of a percent.

"We were hit down big time yesterday and I expect to see some bargain hunting," said Simon Clark, trader at ETX Capital.

Goldman's first quarter result augured well for the pace of corporate activity as 2011 progresses, one banker said.

"Goldman is a good indicator for the global M&A and IPO markets so overall this is encouraging going forward," said Joerg Rahn, chief investment officer at Macard, Stein & Co in Hamburg.

Euro stablises

The euro recovered somewhat from the previous day's sell-off, but the region's debt problems remained in focus and euro zone core bond yields rose.

The single currency edged up to USD 1.4298. Overall, it has pulled back sharply, having hovered at a 15-month high around USD 1.4520 for the past week.

"The European debt crisis is in the market's focus again, and people are concerned there is no lasting solution. Meanwhile, even negative news in the US isn't putting too much pressure on the dollar anymore," said Lutz Karpowitz, currency analyst at Commerzbank in Frankfurt.