European and US shares rise in volatile trading

Shares have risen on both sides of the Atlantic in a day of volatile trading on the stock markets.

Despite continuing concerns about weak economic growth and high levels of national debt in both the US and eurozone, the UK's FTSE 100 index ended up 1.9%, while France's Cac added 1.6%.

The main US share index, the Dow Jones, closed up 4%.

It had earlier been down 0.5% after the Federal Reserve failed to unveil any new measures to help the US economy.

Some investors had hoped that the Fed's statement, which followed the latest meeting of its open markets committee, would have included the announcement of a third round of quantitative easing (QE).

QE is the policy of injecting new money into the banking system to try to boost economic growth.

Instead the Fed only said that US interest rates would probably remain at their current level of between 0% and 0.25% until at least the middle of 2013.

The Fed said that US economic growth was "considerably slower" than expected.

University of Oregon economist Timothy Duy described the Fed's announcement as "weak medicine".

Cary Leahey, senior economist at Decision Economics agreed, saying: "This is a lame way for the Fed to try to help the marketplace."

Traders are concerned that the high national debt levels could impact on already weak economies.

Those worries helped spark Monday's share market rout after one leading ratings agency downgraded the US government's credit rating over the weekend from the top AAA grade.

Chinese concern

China had earlier appealed for global action to stabilise the markets.

Speaking after a regular meeting by the Chinese cabinet, the country's Premier Wen Jiabao alluded to debt problems in the US and Europe and called on "relevant" countries to implement responsible monetary policies and rein in deficits.

According to state radio, he called for the better communication and co-ordination policies as the current uncertainty was "marring a world economic recovery".

However, there was better news on the bond markets, where the yield on both Spanish and Italian government bonds fell for the second day.

The European Central Bank (ECB) has begun intervening in the markets to try to keep the cost of borrowing down for the two countries, which are struggling to avoid a Greece-style bail-out by the authorities.

The head of the European Central Bank, Jean-Claude Trichet, defended his institution's decision: "It is the worst crisis since World War II and it could have been the worst crisis since World War I if leaders hadn't taken the important decisions," he said in an interview with the French radio station, Europe 1.

But Mr Trichet indicated that the main responsibility for fighting the debt crisis lay with eurozone governments and not the central bank.

The eurozone is planning to beef up the powers of the European Financial Stability Facility (EFSF) so that it can start to support government bonds by buying them on the open market.

Individual governments need to ratify the proposals, but delays in doing so have only added to the current uncertainty. Mr Trichet called on eurozone members to "speed up" that process.

Meanwhile Spain's finance minister, Elena Salgado, has again insisted her country does not need a bailout, saying that Spain's total debt was 20 percentage points below the EU average at around 64% of Spanish GDP.

She said Europe would "no doubt" hold a meeting on the financial crisis in early September - although authorities were ready to hold one earlier, if it proved necessary.

On Tuesday, Asian markets suffered further steep falls, although they had recovered around half of their overnight losses by the close.

The Nikkei finished down 1.7%, South Korea's Kospi down 3.64%, and Hong Kong's Hang Seng down 2.8%.

Lacking options

Alan Brown, chief investment officer of Schroders, told the BBC that investors could see no way out of the current troubles.

"The underlying story is all of the weak economic data that we've seen across the eurozone and the UK and the US over the past several weeks," he said.

"I think that investors are recognising that the authorities have very few policy levers left. They have exhausted fiscal options, interest rates in most places are at rock bottom. That is why markets are very nervous."

But Mr Brown said the ECB's moves to support Spain and Italy were "potentially very helpful".

"If they are able to keep a lid on yields in Italy and Spain then they will succeed in stopping the markets creating their own reality whereby they drive yields on Italian and Spanish debt to levels which would cause solvency problems in those countries."

"What's rocking the market is a growth scare," said Kathleen Gaffney of Loomis Sayles.

She said investors were concerned about "how Europe and the US are going to work their way out of a high debt burden" if the global economy slows.

Crude oil prices continued to slide amid concerns that if the economy did slow down, demand would wane in coming months.

Brent crude fell to a six-month low below $100 a barrel before rebounding to $104.

Gold futures hit another new record of $1,778 an ounce as investors looked for assets that are considered to be less risky. The Swiss franc also gained.

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