Monday 21:30 BST. US equity markets were propelled upwards as expectations of an increase in policymakers’ target interest rate subsided, helping stocks claw back some of the losses of last week.

European and Asian equity markets had earlier continued to fall further into the red as nervousness over the outlook for monetary policy continued, but the drops were mitigated later on by a recovery in the New York morning.

Worries that the Federal Reserve will deliver a rate rise next week were diminished after Lael Brainard, a member of the Fed’s board of governors, stuck to her dovish stance and urged caution over any decision to increase interest rates.

The S&P 500 rose 1.5 per cent to 2,159, having fallen 2.5 per cent on Friday. The CBOE’s Vix volatility index — known as Wall Street’s “fear gauge” — also retreated, falling from above 20 to just over 15.

The stock market wobble comes after a prolonged steady period in which the S&P 500 traded in a tight range between about 2,160 and its record close of 2,190, touched in mid-August.

Ms Brainard’s comments helped to quell some of the jitters stirred up last week when Eric Rosengren, president of the Boston Fed, warned the US economy could overheat if interest rates were kept too low.

“Brainard has spoken and a leopard does not change their spots,” said Chris Rupkey, chief financial economist at MUFG. “The Fed governors have dug in deep and are not budging on their go-slow approach to normalising interest rates. They are sticking with their story of prudence and caution if for no other reason than simple politics; their dovish view helps to balance out the 8 of 12 Fed presidents calling for a rate hike.”

Expectations of a rise in interest rates when policymakers meet next week have since fallen to 22 per cent, from 28 per cent at the start of the day.

The US rally stood in contrast to trading on European and Asian bourses, after the European Central Bank stood pat on its stimulus strategy, pushing up bond yields and rattling investors’ risk appetite. Last Thursday, the ECB kept monetary policy unchanged but dashed hopes it might extend the end-date of its bond-buying programme.

The pan-European Stoxx 600 fell 1 per cent with resources groups under pressure as the broad market put industrial commodities under the cosh. Brent crude later recovered from initial losses, rising 0.65 per cent to $48.32 a barrel.

Earlier, Japan’s Nikkei 225 Average fell 1.7 per cent, Australia’s S&P/ASX 200 dropped 2.2 per cent and Hong Kong’s Hang Seng, which last week reached a 13-month high, saw some heavy profit-taking, shedding 3.4 per cent.

Chinese mainland stocks also suffered, with the Shanghai Composite down 1.9 per cent while South Korea’s Kospi dropped 2.3 per cent after shares in Samsung Electronics plummeted following a product warning.

“Central bankers have awakened the market from its summer slumber,” said Keith Parker, global equity strategist at Barclays.

Ian Williams, analyst at Peel Hunt, said: “The extended run of subdued index volatility came to a juddering halt on Friday. What had been a gradual move higher in Treasury yields was echoed across other sovereign bond markets.”

US 10-year Treasury yields, which in early July hit a record low of 1.32 per cent, lost 1 basis point to 1.66 per cent. Outside the US, bond prices continued to edge down and yields inched up. Equivalent maturity German Bund yields, which 10 weeks or so ago touched minus 0.20 per cent, gained 3bp to 0.04 per cent.

There are bigger moves in the eurozone’s so-called “peripheral” paper where ECB buying has been a big suppressor of yields. The 10-year Portuguese yield rose 3bp to 3.17 per cent and Italian benchmarks added 3bp to 1.28 per cent.

Indicative junk and investment grade corporate bond exchange traded funds showed little movement through the day.

Most major currency pairings were relatively calm with the euro moving less than 0.2 per cent versus the greenback. The dollar index fell 0.2 per cent in the New York afternoon to 95.14. Sterling saw a late rise of 0.5 per cent to €1.3336. The yen saw some traditional haven flows, however, pushing the buck down 0.8 per cent to ¥101.85.

Gold, which is sensitive to monetary policy expectations, reclaimed losses from earlier in the day to trade flat at $1,327 an ounce.

Reporting by Joe Rennison in New York, Jamie Chisholm in London and Peter Wells in Hong Kong

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