Bruised markets look to Fed for monetary balm

Bruised financial markets rebounded Tuesday as they looked to the US Federal Reserve for signs of stimulus, while politicians tried to restore confidence in their ability to tackle deficit and debt woes.With the meeting of the Federal Open Markets Committee underway, the Dow Jones Industrial Average was up 1.62 percent, although though some economists doubted that the central bank was ready to unveil a third round of bond purchases known as quantitative easing (QE).The broader S&P 500 was up 2.59 percent and the tech-heavy Nasdaq 3.03 percent. European shares ended days of sharp losses, with London closing up 1.89 percent, Paris up 1.63 percent, and Frankfurt ending nearly flat with a 0.1 percent drop. Eurozone bond purchases by the European Central Bank meanwhile eased pressure on governments in Italy and Spain.Earlier, Asian stocks posted more losses on Chinese inflation concerns.In the first comments by Chinese officials since an historic US credit ratings cut last week, Premier Wen Jiabao urged "relevant nations" to take "concrete and responsible fiscal and monetary policies" to restore investor's trust.China is the largest holder of US debt and has begun to criticise Western countries that have run up heavy debt and deficits, but Chinese inflation was also a key factor behind the stock market slump on Tuesday.At 6.5 percent, the highest level in three years, inflation raised the odds of interest rate hikes that would curb activity in the world's second biggest economy. Attempts by US President Barack Obama and other global leaders to restore trust had some effect as markets posted gains or at least trimmed losses that were driven by fears of a new recession.In Spain, Finance Minister Elena Salgado told Onda Cero radio the eurozone would undoubtedly meet on the financial crisis in early September. "We have been holding telephone conversations and we will no doubt hold a meeting in the first days of September," Salgado said. ECB president Jean-Claude Trichet insisted again Tuesday that governments had to cut public deficits and restore sound finances."We expect governments to do what we consider to be their work, their duty," Trichet told Europe 1 radio in France.A subject of growing concern in Europe were the debt ratings of Britain, and of France which would have to make a major contribution to a hike in emergency lending to Italy and Spain, seen as the next most at risk eurozone countries."Growing concerns about France’s fiscal position have underlined the breadth of the eurozone’s debt crisis," said Jennifer McKeown, senior economist at Capital Economics. "A credit rating downgrade would significantly hamper policymakers’ ability to provide crucial support to the eurozone’s periphery," she noted.French 10-year bonds were offered on Tuesday with a yield of 3.217 percent, or 0.86 percentage points more than benchmark German bonds at 2.355 percent. The yield on Spanish and Italian bonds eased to 5.063 percent and 5.202 percent respectively from 5.138 percent and 5.277 percent late on Monday, as the ECB was understood to be buying in the market.An irony of the US debt crisis is that US debt continues to benefit from its safe-haven status, with investors preferring to park funds in Treasury paper than risk losses elsewhere. Eurozone banks have also resorted to depositing large amounts of surplus cash with the ECB, accepting low rates rather than lending among themselves. On Monday, Obama sought to convince markets that a US downgrade by Standard & Poor's from the top rating of AAA to AA+ did not reflect the true state of the world's biggest economy. The US president insisted that the United States "always will be a triple-A country." Obama also spoke with leaders in Italy and Spain on ways to fight the financial market crisis, but until political measures were ready, Berenberg Bank chief economist Holger Schmieding called for quick action by the Fed, ECB and other central banks. The economist urged Fed chairman Ben Bernanke to disregard "objections from US hardliners" in the opposition Republican Party and seriously mull implementation of QE3.