* Investors return after Thursday's sharp declines
* MSCI World index on track for worst week for 12 months
* European shares up 0.6 pct, Wall Street seen higher
* Dollar steps back from two-week high
By Richard Hubbard
LONDON, June 21 Leading world shares, bonds and
commodities staged a modest recovery on Friday after sharp falls
triggered by the U.S. Federal Reserve's stimulus withdrawal
plan, with investors still assessing the new landscape.
Emerging markets remained under stress, however, and
extended their losses. The signs of U.S. economic strength which
underpinned the Fed's policy change was seen sparking a
migration by investors back to more advanced economies.
While easing fears about an immediate banking crisis in
China helped make for a calmer tone, short-term funding rates
there remain elevated, especially for smaller lenders.
Wall Street was set to open slightly higher after a two day
selloff, but trading could be jumpy as volatility in the market
hit its highest level this year on Thursday, according to a
closely-watched gauge of investor anxiety.
"We are in a new environment," Larry Kantor, head of
research at Barclays said. "It has been an extremely friendly
(investor) environment and now, it is just going to be a bit
MSCI's broad world stock index, which tracks
shares in 45 countries, was up 0.25 percent after dropping 3.5
percent in Thursday's rout, though it remains on course for its
worst week in over a year.
In Europe, the broad FTSE Eurofirst 300 index had
rallied by 0.7 percent at midday, having slid 3.1 percent on
Thursday, for its biggest one-day fall in 19 months. The
recovery was led by food and beverages stocks, "defensive"
sectors which tend to perform steadily in an uncertain
However, there was little respite across the emerging
markets where MSCI's benchmark index added a further
0.5 percent loss to the 4 percent shed in Thursday's violent
selloff, its biggest daily fall since September 2011.
As the Fed's policy tapering gradually pushes U.S. Treasury
yields higher, the attractiveness of the returns on offer in
star developing countries like Turkey and South Africa has
The MSCIEF index has fallen more than 5 percent this week
making for a year-to-date loss of around 15 percent, and many in
the market see further falls ahead.
Emerging market currencies have been under similar selling
pressure with the Korean won < KRW=KFTC> leading the declines to
touch a one-year low on Friday and Malaysia's ringgit
at its weakest in nearly two years.
"In a nutshell, it's a backwash from the post-Lehman fervour
towards emerging markets amidst a zero interest environment,"
said Emmanuel Ng, a foreign exchange strategist for OCBC Bank.
The dollar, which has been the main beneficiary of this
week's turmoil, stepped back from a two-week high against a
basket of developed currencies on Friday but was seen
staying on a solid footing given the Fed's plans.
It also gained 0.4 percent against the yen to 97.60 yen
in choppy trade.
"Players will likely park (assets) in the dollar until we
have got a little more clarity about where the world is going,"
said Neil Jones, head of hedge fund FX sales at Mizuho Corporate
All major equity markets along with many of the world's key
bonds and commodities remain on course for their worst week in
months if not years as investors prepare for the end of Fed's
massive $85 billion a month of liquidity injections.
Fed Chairman Ben Bernanke heralded the end of the era of
easy money on Wednesday when he said that, if the U.S. economy
keeps improving as expected, asset purchases would be scaled
back later this year and end completely by the mid 2014.
The huge stimulus effort has driven many riskier assets to
new highs and even after this week's selloff many will still be
in positive territory for the year though the adjustment to the
Fed's new policy is expected to be ongoing.
"We think the stock markets still have a little bit further
to go. We're a little bit less optimistic than the Fed as we
think fiscal tightening is still going to drag on the economy in
the next few months," said Barclays' Kantor.
A re-emergence of political turmoil in Greece on Friday
complicated the recovery in euro zone assets with the single
currency slipping 0.1 percent to $1.3210, and 10-year
Greek debt yields up 88 basis points to 11.6
But core German bonds were little changed, pausing
after posting their biggest daily drop since March on Thursday.
Commodities saw some demand from investor's attracted by the
week's big price falls although worries about China's sluggish
growth outlook weighed on sentiment.
Gold recovered from a three-year trough to be up 1.2 percent
at $1,292.60 an ounce. Brent crude recovered to
trade up 45 cents at $102.60.