LONDON: European stocks and oil prices turned lower on Tuesday after China raised interest rates for the second time in just over a month, intensifying its fight against inflation.
The commodity-sensitive Australian dollar also fell but world stocks still held near the previous day's 29-month high as China's monetary tightening did little to immediately change the favourable outlook for global growth this year.
Recent strong manufacturing and services sector surveys around the world and a fall in the U.S. unemployment rate point to sustained momentum in the global recovery, while China's latest move is seen as proactively tackling inflation problems.
"It is a clear concern of the markets that a tightening in policy in China will have a dampening effect on demand growth, but probably what more you're seeing here is a knee-jerk reaction to the initial news," said Gayle Berry, analyst at Barclays Capital.
"A lot of people were anticipating some sort of big news over the holiday period, so I wouldn't say it's come entirely as a surprise to everyone in the market."
The MSCI world equity index was up 0.15 percent, having hit its highest level since August 2008 on Monday. The Thomson Reuters global stock index was still up around 0.1 percent.
The FTS Euro first 300 index was down 0.3 percent, turning negative after China's move.
U.S. stock futures were steady on the day. Benchmark U.S. equity indexes hit 2-1/2 year highs on Monday, with news of multi-billion-dollar mergers reinforcing expectations that cash-rich companies are confident enough about the economy to buy up undervalued rivals.
Emerging stocks were down 0.15 percent on the day. China is closed for the Lunar New Year holidays.
From Feb 9, China's benchmark one-year deposit rates will be lifted by 25 basis points to 3 percent, while one-year lending rates will also be raised by 25 basis points to 6.06 percent.
U.S. crude oil fell 1.2 percent to $86.38 a barrel. German government bond futures were steady on the day.
RATE MOVES EYED
The Australian dollar fell around 40 pips to $1.0143 from around $1.0180 before the Chinese move as commodities like copper and gold also turned softer.
In the broader currency market however, the focus was on U.S. and euro zone monetary policies. The euro recovered on Tuesday, having been under pressure after last week's comments from European Central Bank President Jean-Claude Trichet cooled expectations on the pace of monetary tightening.
The euro rose 0.4 percent to $1.3637 while the dollar fell 0.3 percent against a basket of major currencies while
"Our risk-adjusted yield differential indicator has given a fresh euro/dollar sell signal over the past couple of days and we look to use any initial corrective rebound today to establish bearish strategies," BNP Paribas said in a note to clients.
Last week's unexpected fall in the U.S. jobless rate also sparked a rise in U.S. debt yields. The 10-year U.S. yield broke above a trading range that had been in place since early December and U.S. money markets have started to price in some chance of a U.S. rate hike later this year.
Still, investors are reluctant to buy the dollar aggressively after Federal Reserve Chairman Ben Bernanke said last week that the U.S. economy still needs the Fed's help -- a stance many traders expect him to repeat when he speaks on Wednesday.
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