LONDON Spanish and Italian debt eased back from a sharp sell-off on Wednesday and shares staged a modest recovery but investors are wary of signs that the euro zone's debt problems are getting worse or that global growth is flagging.
Yields on Spain's benchmark 10-year bonds fell 11 basis points to around 5.88 percent after rising to nearly six percent on Tuesday on new concerns about the government's ability to cut its deficit.
Italian bond yields fell 14 basis points to 5.56 percent, although yields at a 12-month Treasury bill auction jumped, reflecting doubts about the euro zone and nervousness ahead of a bigger sale on Thursday.
"We are having a kind of mini perfect storm with the conjunction of euro zone crisis flaring up, Chinese inflation and the U.S. labor market data," said William De Vijlder, chief investment officer of BNP Paribas Investment Partners.
Despite the concerns, safe-haven Germany saw soft demand when it offered the lowest ever yield for its 10-year bonds at an auction on Wednesday.
German government bond futures extended their losses after the auction. The main Bund futures contract sank to a day's low of 139.59, a fall of 73 ticks, from around 139.80 before the auction results.
After a strong first quarter for global asset markets thanks largely to massive liquidity injections by the world's major central banks and some positive economic numbers, investors have begun the second quarter more nervous about the outlook.
Recent data showed the U.S. jobs market was surprisingly weak in March while China's annual inflation rate jumped more than expected to 3.6 percent.
In the share markets on Wednesday, global stocks as measured by the MSCI world equity index .MIWD00000PUS were little changed but Asian markets weakened after a sharp fall in key U.S. stock indexes on Tuesday.
U.S. stocks could recover later after aluminum producer Alcoa Inc (AA.N) surprised Wall Street with a first-quarter profit after a loss in the fourth quarter of 2011 as demand from the aerospace and automobile sectors improved.
The FTSE Eurofirst .FTEU3 index of top European shares, which dropped to levels last seen in mid-January on Tuesday, recovered to be up nearly 0.5 percent at 1030.90.
Equity market reaction to easier central bank policies:
Euro zone debt crisis: r.reuters.com/hyb65p
Asset returns in 2012: link.reuters.com/nyw8
The euro has been resilient to the selloff in the sovereign debt of peripheral countries and edged up 0.25 percent to $1.3110, while the yen benefited from safe-haven demand, rising to a 6-week high against the dollar.
However, the euro was seen vulnerable to further bouts of selling, especially if Spanish and other euro zone government bond yields were to start rising again.
In commodity markets oil fell below $120 a barrel to its lowest level in almost two months, pressured by rising U.S. inventories and concern about the strength of global demand.
North Sea Brent was down 30 cents at $119.58 a barrel, after falling as low as $119.05, its lowest since February 17.
Gold also edged lower, pausing after four consecutive sessions of gains, driven by safe-haven flows on the cloudier global economic outlook, but investors have turned cautious, awaiting further clues on growth.
Spot gold inched down 0.2 percent to $1,656.96 an ounce, after hitting a one-week high of $1,662.60 on Tuesday. U.S. gold lost 0.1 percent to $1,658.50.
(Editing by Anna Willard)