By Patrick Graham LONDON (Reuters) - Stock markets in Europe recovered from a poor start on Thursday after a batch of more optimistic than expected surveys of German and euro zone purchasing managers leavened an otherwise shaky mood.
Asian markets had drifted lower overnight, unimpressed by a similar survey out of China, which was marginally above forecast but still showed the world's second largest economy slowing further at the start of the fourth quarter.
Concerns over growth, banks and a beckoning era of deflation in Europe were at the heart of a stock market sell-off at the start of October, although the past week has seen Europe in particular recover.
The chief positive is the continuing strength of Germany and surveys of both manufacturing and service sector sentiment were sharply better than forecast, going against a weaker round of data earlier this month. Investors say the beginnings of a new round of action from the European Central Bank this week have also helped bolster the mood.
"I know it's crazy but I felt physically better when I knew the ECB had started actually buying covered bonds on Monday," said David Stubbs, a global strategist at J.P. Morgan in London.
"In a few months there is going to be so much more clarity in the financial sector in Europe. And if the banks are healthier then you have a fighting chance of having a good year."
After falling more than 1 percent across the board after a poor French survey earlier, European shares were 0.1 percent higher by 0830 GMT.
The long-awaited results of stress tests on Sunday offer hope of a watershed of some kind for European lenders, although the run-in, filled with a handful of reports that some banks will fail, has added to market nerves this week.
The broader concern is that, with growth weak, Greece and the rest of the euro zone's highly indebted southern half, will struggle to dig themselves out of a mountain of debt, pushing the continent back into crisis.
"We think the eurozone might be entering a stubborn phase of subdued growth as deleveraging continues and the world economy weakens," analysts from ratings agency Standard and Poor's said in a report released on Thursday.
"Monetary and fiscal policies alone cannot lastingly improve the eurozone's economic growth trajectory."
CHINA ON MY MIND
After a month which has seen investors abandon expectations of an early rise in interest rates in Britain or the United States, there was still plenty to worry investors.
Shares in Britain's largest supermarket chain Tesco sank 5 percent in value after it abandoned its predictions for full-year profit in the latest in a poor run of results. Official UK data on retail sales also disappointed.
Japan's Nikkei share average fell 0.4 percent while MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.3 percent. After a brief recovery, oil prices, hammered this month, were also lower on the day. [O/N]
The Chinese flash HSBC/Markit manufacturing purchasing managers' index (PMI) edged up to 50.4 from a final reading of 50.2 in September, just a hair's breadth from the 50.3 reading forecast by analysts.
But the level of output in factories fell to a five-month low of 50.7, just above the 50-point level that separates growth from contraction on a monthly basis, pointing to a still-shaky economy.
"While the manufacturing sector likely stabilized in October, the economy continues to show signs of insufficient effective demand," said Hongbin Qu, chief economist for China at HSBC.
Falling oil prices also lent an air of caution and underscored worries over the health of the global economy.
"I think it will take some time before markets calm down. Market sentiment is still fragile. The market has realized that the U.S. economy cannot be decoupled from sluggishness in the rest of the world," said Tsuyoshi Shimizu, chief strategist at Mizuho Asset Management.
"But on the other hand, I think the market is now going to the other extreme in betting on recoupling of the U.S. and the rest of the world," he added.
(Additional reporting by Hideyuki Sano in TOKYO, Marc Jones in London, editing by Andrew Heavens)