Portugal Colonial - Stocks bounce back after rout but jitters remain

Tokyo, which suffered a record loss Monday, led gains in Asia to close up more than 10 percent, making up some of its losses from a catastrophic start to the week as traders bought beaten-down stocks.

The rebound failed to gain much traction in Europe, however, where the main markets closed narrowly mixed.

The main indexes in New York were up slightly, far from enough to recoup Monday's losses.

Analysts warned there may be more volatility to come.

"We might not be out of the woods yet," said market analyst Fawad Razaqzada at City Index and FOREX.com.

Monday's sell-off followed data Friday showing fewer US jobs than expected were created last month, while another report pointed to continuing weakness in the manufacturing sector.

That led to warnings the US Federal Reserve had kept rates at more than two-decade highs for too long and risked causing a recession.

Monday's plunge was also triggered by a rally in the value of the yen which threw a wrench into a common trading strategy of borrowing at low interest rates in Japan and investing in high yielding assets elsewhere, like US tech stocks.

But with the Bank of Japan raising interest rates last week and the Fed poised to cut rates, this so-called yen carry trade was at risk and many investors needed to dump assets to cover their positions, magnifying the rout.

With the yen giving up some of its recent gains Tuesday, the markets were calmer.

"The carry-trade unwinding might have settled down for now, but this market is understandably leery of it revving back up given how entrenched it had become with Japan holding rates below zero, or near zero, for so long," said Briefing.com analyst Patrick O'Hare.

David Morrison, senior market analyst Trade Nation, said "we have no idea how far through the carry-trade unwind we are", adding "the probability is that this isn’t over."

Still, Wall Street stocks bounced, with the tech-heavy Nasdaq Composite rising 1.0 percent after having lost more than three percent on Monday.

"There is some buy-the-dip interest. Still, it is fair to say that it is not a hard-charging rebound effort given the scope of recent losses," added O'Hare.

European stocks couldn't hold onto early gains and fell back in afternoon trading.

Monday's stock plunge sparked speculation that the US central bank could carry out an emergency interest rate cut to stave off a recession.

Analysts have downplayed that possibility.

"Emergency intervention from the Fed seems unlikely," said Richard Hunter, head of markets at Interactive Investor.

Briefing.com's O'Hare said the market also remains leery of the US economy slowing more than expected.

He pointed to reassuring data, including the US trade deficit narrowing in June, with both imports and exports increasing, "which is a constructive trade dynamic for the global economy".

A forecast-beating read on the key US services sector on Monday also provided some reassurance that the world's largest economy isn't heading headlong into recession.

- Key figures around 1530 GMT -

New York - Dow: UP 0.6 percent at 38,942.44 points

New York - S&P 500: UP 1.1 percent at 5,240.56

New York - Nasdaq Composite: UP 1.0 percent at 16,356.28

London - FTSE 100: UP 0.2 percent at 8,026.69 (close)

Paris - CAC 40: DOWN 0.3 percent at 7,130.04 (close)

Frankfurt - DAX: UP less than 0.1 percent at 17,354.32 (close)

EURO STOXX 50: UP less than 0.1 at 4,575.22 (close)

Tokyo - Nikkei 225: UP 10.2 percent at 34,675.46 (close)

Hong Kong - Hang Seng Index: DOWN 0.3 percent at 16,647.34 (close)

Shanghai - Composite: UP 0.2 percent at 2,867.28 (close)

Dollar/yen: UP at 144.62 yen from 144.05 yen on Monday

Euro/dollar: DOWN at $1.0931 from $1.0959

Pound/dollar: DOWN at $1.2698 from $1.2773

Euro/pound: UP at 86.08 pence from 85.77 pence

Brent North Sea Crude: UP 0.3 percent at $76.54 per barrel

West Texas Intermediate: UP 0.4 percent at $73.22 per barre

burs-rl/gv

A.Motta--PC