Investors were edgy Wednesday ahead of the appearance of U.S. Federal Reserve chairman Ben Bernanke before lawmakers in Congress.
Following a run of upbeat U.S. economic news, largely related to housing and jobs, there's been talk in the markets that the Fed may soon put a brake on its super-easy monetary policy, which has boosted liquidity in financial markets over the past few years.
However, on Tuesday, regional Fed chief James Bullard said the Fed should continue its monthly $85 billion in bond purchases, which drives down interest rates and thus encourages lending and spending, to help spur the U.S. economic recovery.
One aspect of the monetary stimulus, which has been replicated by a number of other central banks around the world, including most recently the Bank of Japan, has been to send stock indexes flying despite a patchy recovery from recession in many parts of the world.
Over the past few weeks, a number of the world's main markets, such as the Dow Jones and Germany's DAX have recorded a series of all-time highs, while others such as Japan's Nikkei and Britain's FTSE 100 have hit multi-year highs.
"So far, Bernanke has remained pretty dovish, which is what I expect more of today," said Craig Erlam, market analyst at Alpari. "However, any hawkish undertones from Bernanke could spark some panic in the markets."
Ahead of the testimony which starts at 1400 GMT, stocks drifted lower.
In Europe, the FTSE 100 was down 0.2 percent at 6,790 while the DAX fell 0.3 percent to 8,443. The CAC-40 in France was 0.6 percent lower at 4,011.
Wall Street was poised for a steady opening, with both Dow futures and the broader S&P 500 futures 0.1 percent higher. How they perform during the day will clearly be impacted by Bernanke's testimony. However, there are a number of other releases that will be monitored, including existing home sales data as well as the minutes to the Fed's last policy meeting.
"Investors will await clues on central bank stimulus measures before deciding whether to continue with their increasing appetite for equities," said Andy McLevey, head of dealing at stockbroker Interactive Investor.
Stock investors aren't the only ones on edge. In the currency markets, dollar bulls have been in the ascendancy over recent weeks on the growing expectation of a change of approach by the Fed. It's also been driven higher against the yen following the Bank of Japan's announcement of an aggressive monetary stimulus that it hopes will finally bring an end to the country's two-decade stagnation. The euro was 0.2 percent higher at $1.2939 while the dollar rose 0.5 percent to 102.88 yen
Earlier in Asia, stocks rebounded on the back of Bullard's comments, with Japan's Nikkei 225 index up 1.6 percent at 15,627.26, its highest close in more than five years. The Bank of Japan concluded a two-day policy meeting without any changes to its aggressive monetary easing stance, as expected, and said the world's third-largest economy is showing signs of picking up.
South Korea's Kospi rose 0.6 percent to 1,993.83 while mainland Chinese shares ended a five-day winning streak, with the Shanghai Composite Index falling 0.1 percent to 2,302.40. The smaller Shenzhen Composite Index lost 0.9 percent to 1,021.40. Hong Kong's Hang Seng, where trading was suspended in the morning due to bad weather, fell 0.5 percent to 23,261.08.
Oil prices drifted lower, with the benchmark New York rate down 68 cents at $95.50 a barrel.
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Pamela Sampson in Bangkok contributed to this report.
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