London’s FTSE 100 index of leading shares ended the day with a small gain of 0.08 percent to 6,304.63 points, while in Paris the CAC 40 added 0.11 percent to finish at 3,797 points.
In Frankfurt the DAX 30 index trimmed earlier losses to close down 0.59 percent at 8,095.39 points
“In a classic indication of how fickle markets can be Europe’s markets staged a remarkable turnaround this afternoon after dropping sharply on the open in the wake of the 6.35 percent decline in the Nikkei overnight as investors worried about the longevity of future central bank stimulus measures…” said analyst Michael Hewson at CMC Markets UK.
Sentiment also took a knock as the World Bank slashed its growth forecast for China’s economy this year to 7.7 percent from 8.4 percent, warning of a potential “sharp” slowdown triggered by a fall in investment.
“All it took was some positive US economic data and suddenly the sun came out” on European markets, added Hewson.
US retail sales rose by a strong 0.6 percent in May, while new jobless claims fell last week to 334,000.
European markets had slumped in early trading Thursday after Tokyo’s benchmark Nikkei index dived 6.35 percent to close at 12,445.38 points as a strong yen hurt exporters, traders said.
The heavy drop, which has resulted in the Nikkei losing since May about one fifth of its value, the definition of a bear market, has been attributed largely to jitters over an end to central bank stimulus.
Concern is focused mainly on the phasing out of the US Federal Reserve’s massive monetary stimulus, known as quantitative easing, which has been credited with propping up global equity markets in recent months.
However, cracks have also begun to emerge in a plan by Japanese Prime Minister Shinzo Abe to power the world’s third-largest economy, a blueprint dubbed Abenomics.
Investors were also disappointed the Bank of Japan didn’t pump in more money stimulus this week.
However fears that a phasing out of quantitative easing “will mark the start of a prolonged bear market for equities are probably overdone,” according to Julian Jessop, chief global economist at Capital Economics.
“Quantitative easing only becomes quantitative tightening when the central bank starts to sell back the assets it has bought, or drains the extra liquidity in other ways,” he noted.
The Fed has only talked about tapering off its stimulus as the recovery of the US economy gains traction and said it plans to keep interest rates low for a considerable time.
In foreign exchange, the European single currency dipped to $1.3311 from $1.3337 late in New York on Wednesday.
The dollar fell to 94.36 yen from 95.94 yen on Wednesday.
The broad-based S&P 500 added 0.40 percent to 1,618.96 points, while the tech-rich Nasdaq Composite lost 0.31 percent to 3,411.08 points.
Meanwhile, Britain’s markets watchdog is holding talks with “relevant parties” over allegations of foreign exchange market manipulation by banks, a spokesman said on Thursday.
“The Financial Conduct Authority is aware of these allegations and has been speaking to the relevant parties. However, we can’t comment further at this time,” a spokesman told AFP.
The development comes as the European Commission is shortly expected to present proposals to tighten up oversight of key financial market benchmarks, especially of interest rates, in the wake of last year’s Libor interbank rate-rigging scandal.
On the corporate front, shares in Royal Bank of Scotland slumped 3.3 percent to 315 pence — as it announced 2,000 job cuts one day after the state-rescued lender said that chief executive Stephen Hester was stepping down to allow someone else to help it return to the private sector.