Stocks rebounded Friday as investors breathed a sigh of relief at the news that the U.S. added more jobs than expected during July, putting a halt to one of the worst selloffs since the height of the 2008 financial crisis.
The monthly U.S. jobs data, which often set the market tone for a week or two after their release, were keenly awaited after Thursday's rout, when stocks suffered one of their worst days since the collapse of U.S. investment bank Lehman Brothers in 2008.
In the run-up to the release, there were fears that the figures may have added to growing market fears that the world's largest economy was heading back into recession.
But their release has assuaged those fears somewhat though not necessarily eased worries of the pace of the U.S. recovery.
The U.S. government reported that some 117,000 jobs were added in July and that the unemployment rate inched down to 9.1 per cent from 9.2 per cent in June.
Neither of these numbers showed an economy in full bloom, but compared with a dismal job market in June and expectations of 85,000 new jobs.
Almost immediately, Wall Street futures turned around, helping ease the pressure on European markets, which have been additionally weighed down by worries over the debt situation of Italy and France, "The headline surprise, compounded by upward revisions and an unexpected drop in the unemployment rate help to diffuse some of the severe pessimism over the outlook for the U.S. economy that has set in over the past two weeks," said Michael Woolfolk, an analyst at Bank of New York Mellon.
In the U.S., the Dow Jones industrial average was trading 1.3 per cent higher at 11,530 while the broader Standard and Poor's 500 index rose 1.2 per cent to 1,215.
In Europe, France's CAC-40 gained 1.5 per cent to 3,369, while U.K. and Germany markets retraced most of their morning losses. The FTSE 100 was down 0.7 per cent at 5,354 and the DAX was 0.4 per cent lower at 6,392.
The stock markets in Italy and Spain, the two countries that had become the focus of investors' debt fears in recent weeks were among Friday's best performers, adding 1.9 per cent each.
The bond market pressure on the two countries also eased through the day after briefly flirting with euro-era highs.
The yield, or interest rate, on Spanish and Italian bonds declined, but remained at levels that are deemed unsustainable in the long-term. The yield on Italian 10-year bonds was at 6.16 per cent, higher than the 6.05 per cent demanded for their Spanish equivalents for the first time since May 2010.
Eurozone leaders' reluctance to increase the size of their bailout fund and quickly implement changes to its powers, such as giving it the ability to buy up government bonds, have left the currency union without a clear defense against market troubles over the summer.
While the jobs report out of the U.S. was a welcome relief for investors, who had dumped risky assets for much of the week, concern about the health of big Western economies was set to drag on for the rest of the summer.
"Markets will remain nervous until more convincing signs of recovery emerge," said Sal Guatieri, senior economist at BMO Capital Markets. "We still look for a near doubling in (U.S.) GDP growth in Q3 from the 1.3 per cent pace in Q2." The protracted debate about raising the debt ceiling in the U.S. and confusion about Europe's strategy to fight its worsening debt crisis have undermined confidence in policy makers' willingness and ability to finally draw a line under the financial troubles that have plagued the Western world for four years.
Disagreements in the U.S. Congress are set to herald more struggles about budget cuts at a time when many economists are calling for economic stimulus, while investors fear that Europe may be overwhelmed by growing troubles in Italy and Spain, the eurozone's third and fourth largest economies.
The jobs data also had a modest impact in the oil markets.
Oil prices were down only 18 cents to $86.45, since a better economy contributes to energy demand.
The euro regained some of its recent losses Friday as investors were more confident in buying riskier assets, trading up 1.1 per cent at $1.4223.
Earlier in Asia, Japan's Nikkei 225 stock average slid 3.7 per cent to 9,299.88 and Hong Kong's Hang Seng dived 4.3 per cent to 20,946.14. China's Shanghai Composite Index lost 2.2 per cent to 2,626.42.
Japanese stocks were further weighed down by a further export-sapping appreciation in the yen despite Thursday's intervention in the markets by the Japanese government to weaken the currency. Finance Minister Yoshihiko Noda said authorities acted to protect the economic recovery following the March 11 earthquake and tsunami.
The dollar was 0.8 per cent lower at 78.64 yen. On Thursday, it spiked above 80 yen following the intervention, which was prompted by Monday's slide to 76.29 yen.