By Marc Jones
LONDON (Reuters) - European shares clung to slender gains on Wednesday as disappointing Christmas retail sales took the gloss off the best euro zone PMI figures in 2-1/2 years and calmer conditions in emerging markets.
Overnight trading in Asia had been mixed despite a rebound on Wall Street, and European nerves were beginning to wobble again as a sharp drop in December shop sales added to caution before the European Central Bank's monthly meeting on Thursday.
The euro inched lower and the FTSEurofirst 300 share index <.FTEU3> was up just 0.2 percent. It had earlier climbed 0.4 percent after Markit's euro zone Composite PMI, which gauges business activity across thousands of companies, brightened the market mood.
The survey showed the 18-member bloc's recovery becoming increasingly broad-based, with Germany leading an upswing in peripheral members and signs of a stabilization in number two economy France.
Retail data shortly afterwards disappointed, however, with a 1 percent fall in December sales compared with a year before highlighting the pressure still on consumers.
"Technically, the market is clearly 'oversold', and investors should be rushing in," said Jeanne Asseraf-Bitton, head of global cross-asset research at Lyxor Asset Management.
"But the problem is the global economic recovery that everyone was betting on just a few weeks ago doesn't seem to be as smooth as expected."
The mixed signals from Europe followed data hiccups from the United States and China, the world's biggest economies, earlier this week.
Calmer markets in vulnerable emerging nations like Turkey, South Africa and Russia also helped nerves, but dealers warned the mood remained brittle and that it a poor U.S. payrolls report on Friday could set the bears running again.
The ADP reading on private hiring is due later on Wednesday, and investors are likely to react badly to any disappointment.
WALL STREET SOFT
After recovering slightly on Tuesday, futures prices foresaw Wall Street back in the red when trading resumes. As well as the jobs report, there will also be services PMI data just before 1400 GMT to enliven things until Friday's payrolls.
In Asia, recent strains had continued to take their toll. Demand for safety in the yen and top-rated bonds grew on a roller-coaster day for Toyko's Nikkei <.N225> while Chinese stocks suffered more losses.
The Nikkei eventually closed up 1.2 percent, but swings throughout the day meant it never got close to testing resistance at the 200-day moving average. The index has shed 14 percent this year following last year's 50 percent boom.
The underwhelming bounce in the Nikkei was all the more disappointing following some bumper big-name company earnings. It led investors to again bid up the safe-haven yen, with the dollar dipping to 101.20 yen from an early top of 101.77.
"The key will be the U.S. data, and any missing of forecasts will challenge the global recovery story and push dollar/yen towards the 100.60 support," said Jeremy Stretch, head of currency strategy at CIBC World Markets in London.
The euro eased a touch to $1.3510 and German Bund yields returned to six-month lows, still driven by speculation that the threat of deflation might nudge the ECB into easing policy on Thursday.
Sterling was also forced lower by unspectacular UK PMI data, though Tuesday's signal that rate cuts are no longer on the agenda in Australia left the Aussie dollar enjoying the view at $0.8910 after climbing a steep 2 percent.
It also rallied against the euro and yen as speculators abandoned short positions in what had been a very crowded trade.
Market volatility remained elevated <.VIX>, although partly because battered emerging market currencies like Russia's rouble, Hungary's forint and South Africa's rand extended their recovery into a second day.
The broader reluctance to take risks led to demand for U.S. Treasuries, with the 10-year yield ticking down to 2.6185 percent, not far from a recent three-month low of 2.57 percent. Gold got a boost as it pushed back towards $1,260 an ounce.
In commodities, prices for wheat were boosted by dry weather and deteriorating crop conditions in the United States. Soymeal and corn were both in high demand.
Broad gains in grains and natural gas lifted the Thomson Reuters/Core Commodity Index <.TRJCRB> by 1 percent, the biggest one-day gain in nearly a month.
U.S. oil futures rose on bets that a stockpile at a key delivery point caused by the start-up of a major pipeline would be reduced. The March NYMEX contract added 64 cents to $97.84 a barrel. Brent crude rose 42 cents to $106.20.
(Additional reporting by Anirban Nag in London, Blaise Robinson in Paris and Wayne Cole in Sydney; Editing by Catherine Evans)