European stocks shed most of their gains Tuesday after a slightly disappointing U.S. housing report reinforced concerns that the market rally over the last three months was not justified by economic data.
Investors, already in jittery mood after Monday's big losses, started selling again after the National Association of Realtors reported that sales of previously owned homes rose by a small-than-expected 2.4 percent annual rate in May. Markets were anticipating a 3.1 percent rate.
The data fed into market fears that the stock rally since March was overdone. Experts say investors need stronger evidence that the world economy and company earnings are improving to make sense of current stock valuations.
"Traders now seem to be taking this as further confirmation that the optimism in stock markets may have overshot and that over recent months markets were guilty of focussing on the minor positives instead of looking at the bigger picture," said Anthony Grech, market strategist at IG Index.
As a result, earlier gains in Europe were mostly wiped out and the FTSE 100 index of leading British shares closed down 4.03 points, or 0.1 percent, at 4,230.02. One bright spot in London was news and information company Thomson Reuters PLC, whose share price rose nearly 4 percent after it said it plans to cancel its listing on the London Stock Exchange and remain in Toronto and New York.
The CAC-40 in France was 6.43 points, or 0.2 percent, lower at 3,116.82, but Germany's DAX rose 13.75 points, or 0.3 percent, to 4,707.15, as utility stocks such as E.ON AG and RWE AG were in demand after analysts at JP Morgan recommended the industry.
On Wall Street, the Dow Jones industrial average was down 24.41 points, or 0.3 percent, at 8,314.60 around midday New York time while the broader Standard & Poor's 500 index fell 1.25 points, or 0.1 percent, to 891.79.
Tuesday's modest losses come on top of the big retreat on Monday, which carried on into the Asian session, when investors were spooked by the warning from the World Bank that the global economic downturn in 2009 would be steeper than anticipated. The multilateral lender is now expected the global economy to shrink 2.9 percent this year, far more than its previous forecast of a 1.7 percent decline.
"Yesterday's nervousness serves as a timely reminder that talk of green shoots or even exit strategies for central banks are highly premature," said Gareth Berry, an analyst at UBS.
Equities rallied from the middle of March until June on hopes that the U.S. economy in particular will recover from recession sooner than anticipated. As a result, many investors saw valuations around the world as particularly cheap and started buying into the market.
In light of the current uncertainty, investors will be closely looking at Wednesday's statement from the U.S. Federal Reserve. Though the Fed is widely expected to keep its benchmark interest rate in the range of zero to 0.25 percent, investors will be focusing on what it says about current economic prospects and how long it expects to keep monetary policy as accommodating as it is.
Most analysts think the Fed has a difficult balancing act — expressing the view that the worst of the recession is over at the same time as not spooking investors into thinking that interest rates will rise any time soon.
Hans Redeker, an analyst at BNP Paribas, reckons the Fed will be keen to cap the rise in bond yields, which has been one of the main reasons why stock markets have faltered over the last couple of weeks.
"One way in which the Fed could go about doing this is by signaling that it has no intention to raise rates in the short term whilst providing optimism on the recent improvements in data," said Redeker.
Earlier, Asian stock markets fell in the wake of the big U.S. and European losses on Monday.
Japan's Nikkei 225 stock average lost 276.66 points, or 2.8 percent, to 9,549.61 while Hong Kong's Hang Seng shed 521.19 points, or 2.9 percent, to 17,538.36.
South Korea's Kospi lost 2.8 percent, Australia's index was off 3.1 percent and Taiwan's benchmark dropped 2.3 percent. Shanghai's main stock measure traded lower by 0.1 percent.
Worries that the recovery will be slow and protracted continued to weigh on oil prices, which fell again after two days of big losses. Benchmark crude for August delivery was down 53 cents at $66.97 a barrel on electronic trading on the New York Mercantile Exchange.
In currencies, the dollar fell 0.3 percent to 95.22 while the euro was 1.2 percent higher at $1.4013.
