World stocks fell Tuesday as investors worried that the recent rally may be overdone and were unsettled by the geopolitical tensions in Asia, where North Korea test-fired two missiles just a day after its nuclear test.
In European afternoon trading Germany's DAX 30 was 1.4 percent lower at 4,849.37 and Britain's FTSE 100 was down 0.9 percent at 4,325.09. France's CAC 40 fell 1.4 percent at 3,192.40.
Futures markets forecast a drop on the U.S. open. Dow industrial average futures were down 40 points at 8,220.00 while Standard & Poor's 500 futures were down 3.9 points at 881.00.
European shares followed Asia lower after North Korea, defying international criticism, followed up Monday's test of a nuclear bomb by firing two short-range missiles from its east coast.
The move came after the U.N. Security Council condemned the country's nuclear test as a "clear violation" of international bans.
Mitul Kotecha, head of global forex strategy at Calyon, said the news of the missile tests "reverberated through markets overnight." Although its impact has been relatively limited so far, "reports that North Korea is preparing to launch more missiles over coming days may keep markets nervous," he said.
Beyond the geopolitical incident, the market selloff was also due to investors taking a breather from the weeks-long rally which had been fueled by hopes that the worst of the economic
recession is past.
With more downbeat economic news in recent days — including fears of credit ratings downgrades on major economies like the U.S. and U.K. — traders' optimism has become clouded and markets have been looking for direction.
"We seem to be stuck at the current levels," said Winson Fong, managing director at SG Asset Management in Hong Kong, which oversees about $2 billion in equities in Asia. "The market has rebounded so much we're going to need major good news to go higher or major bad news to persuade people to take some profits."
The most prominent victim of the credit ratings fears for the U.S. has been the dollar, which has slumped in value, particularly against the pound and euro, hurting prospects for European company profits.
After jumping from $1.34 in mid-May to above $1.40 on Monday, the euro traded at $1.3893 on Tuesday. During the same period, the pound rose from $1.51 to $1.5845 on Tuesday after trading at $1.5710 on Monday. The dollar managed to eke out gains against the yen, however, to 94.99 yen from 94.84 on Monday.
In Germany, consumer confidence figures failed to boost markets. The GfK research group said its forward-looking consumer climate index for June remained at 2.5 points, unchanged from May and April levels, as anxiety over job security weighed on broader hopes that the economy may be improving.
Shares in Danone, the maker of Evian mineral water and Activia yogurt, fell as much as 7.6 percent in Paris after the company announced it would raise €3 billion ($4.2 billion) in new capital to pay down debt in the face of what it expects will be a long-lasting economic downturn.
Looking ahead, the market was awaiting reports on U.S. home prices and consumer confidence. The S&P/Case-Shiller home price index is expected to show a slightly smaller drop in March than in February, while the Conference Board's consumer confidence index is anticipated to indicate a rise in May.
In Asia, Japan's Nikkei 225 stock average closed down 36.19 points, or 0.4 percent, to 9,310.81, while Hong Kong's Hang Seng lost 130.26 points, or 0.8 percent, to 16,991.56.
In South Korea, the Kospi shed 2.1 percent at 1,372.04. The benchmark dived over 6 percent Monday on news of North Korea's nuclear test before recovering nearly all its losses.
Shanghai's index lost 0.8 percent, while Taiwan and Singapore markets dropped almost 1 percent and India's Sensex fell 1.5 percent. The only major gainer was Australia, where the key index rose 1.4 percent.
Oil prices fell in European trade ahead of OPEC's meeting this week, with benchmark crude for July delivery trading at $60.30 a barrel, down $1.37 from overnight trade.
