Stock markets stabilise after sharp falls

Markets regained ground in US afternoon trading, ending a 48-hour slide sparked by comments by the US Federal Reserve.

On Wall Street, shares ended Friday fractionally higher, after recovering from falls earlier in the day that saw European markets close 1%-2% lower.

It came after markets fell sharply on Thursday, a day after the Fed said it may rein in its stimulus programme.

However, on Friday a dissenting member of the Fed's policy committee sharply criticised the statement.

After an official blackout on discussion of the meeting expired, James Bullard, president of the St Louis Fed, said in a statement the Fed's decision to announce details about when it would trim its bond-buying programme was "inappropriately timed".

Mr Bullard said it was a mistake to raise market expectations of an imminent wind-down of the programme.

Explaining his decision to dissent from the central bank's policy decisions for the first time, he claimed the move would damage the Fed's credibility at a time when core inflation - a proxy for long-term inflation trends, currently running at 1% - was well below the Fed's 2% target.

Hawkish tone

The Fed has been trying to support the weak US economy by buying bonds at a rate of $85bn (£54bn) a month, through a programme known as quantitative easing (QE).

However, on Wednesday, Fed chairman Ben Bernanke said that if the US economy continued to show signs of improvement then the central bank could start to slow down its bond purchases as early as this year, and end the programme next year.

The bond-buying programme has been seen as a key factor behind the rise in stock markets in recent months, as the cash proceeds from the bond purchases flood through the economy and keep long-term interest rates low.

Another committee member also dissented from the statement, but for the opposite reason to Mr Bullard. Kansas City Fed president Esther George expressed concern that the Fed's bond buying would destabilise financial markets.

Mr Bernanke - who has spent much of his time in office persuading more hawkish colleagues of the merits of QE - was authorised by the Fed's policy-making Open Market Committee to deliver the unusual verbal statement.

Markets reacted to the perceived hawkishness of the committee by significantly bringing forward expectations for when the Fed will start to raise US short-term interest rates from their current historic low of between zero and 0.25%.

Although Mr Bernanke made clear in the statement that the Fed did not expect to raise rates until well into 2015, futures markets priced in a 50% chance of a rate rise by September next year.

China worries

The Dow Jones Industrial Average ended Friday 0.3% higher, partly reversing a 2.3% drop on Thursday - its biggest one-day fall of the year.

Technology stocks did badly, after Oracle announced disappointing results, with the tech-heavy Nasdaq index closing 0.2% lower.

Behind the bearish tone was a rise in long-term interest rates, as markets continue to price in expectations that the Fed will start raising short-term US interest rates sooner than previously thought.

The 10-year yield on US Treasuries - the benchmark for the Federal government's long-term cost of borrowing - rose from 2.41% to 2.54%. In early May it stood at less than 1.7%.

The prospect of higher returns in the US dragged the dollar higher against most other currencies, up 0.7% against the euro, 0.5% against sterling and 0.6% against the yen.

It also drove long-term borrowing costs marginally higher in other countries, including the UK and eurozone.

Another factor that spooked markets on Thursday was news of record high borrowing costs in China this week, raising fears of a Chinese credit crunch and a stalling of the world's growth engine.

However, the apparent stress in the country's banking sector appeared to ease somewhat on Friday as the People's Bank of China intervened.

As a result, commodities markets - in which Chinese demand plays a dominant role - had a somewhat mixed day.

The oil price fell further, with Brent crude futures dropping 1.2% to just under $101 a barrel.

Industrial metals - many of which are intensively used in China's construction boom - were more resilient, with copper rebounding 0.7%.