By Tom Wilson and Kane Wu
LONDON/HONG KONG (Reuters) - European stocks steadied on Tuesday, after heavy losses a day earlier sparked by fears over a highly infectious new strain of COVID-19, as Washington approved an $892 billion pandemic relief package.
The broad Euro STOXX 600 gained 1.2%, on course for its biggest one-day jump in over five weeks. German and French indexes both added 1.3%.
London's blue chips turned positive, too, recovering early losses even as Britain adjusts to strict lockdowns imposed to curb the spread of the new strain of coronavirus. They were last up 0.3%
Countries across the world shut their borders to the UK on Monday because of fears over the new variant of the disease, snarling one of Europe's most important trade routes just days before Britain is set to leave the European Union.
The discovery of the new strain, just months before vaccines are expected to be widely available, renewed fears about the economic impact of new lockdowns to curb the virus that has killed about 1.7 million people worldwide.
European shares had slumped to their biggest one-day loss in nearly two months on Monday in response. But market players said on Tuesday they assumed vaccines would still be effective against the new strain.
The new strain "is a bump in the road, but that road is still leading to a much stronger recovery in the second half of next year," said Hugh Gimber, global market strategist at J.P. Morgan Asset Management.
"Markets are a lot calmer today because of confidence that there is a big build up of pent-up demand and a return to much stronger levels of activity in the second half of next year."
The MSCI world equity index, which tracks shares in 49 countries, was flat. Wall Street stocks were expected to open flat, despite Congress's approving an $892 billion coronavirus aid package after months of inaction.
The stimulus package, the first congressionally approved aid since April, comes as the pandemic accelerated in the United States, infecting more than 214,000 people every day and slowing the economic recovery.
Earlier, MSCI's gauge of Asia Pacific stocks outside Japan fell 0.8%, dragged down by Hong Kong's Hang Seng Index and China's benchmark CSI300 Index
THE POUND'S PROSPECTS
The stimulus news helped prop up the dollar index, which was on course for a third consecutive quarterly loss and had dropped some 12.5% from a March peak.
The index, which measures the dollar against a basket of six major currencies, was last up 0.1% at 90.233, still below its Monday top of 90.978.
Sterling was down 0.2%, after tumbling as much as 2.5% versus the dollar on Monday to a 10-day low as currency traders weighed twin fears over COVID and Brexit.
Analysts remained pessimistic on the pound's prospects, even after it recovered on Monday some of its losses on media reports of progress in Brexit trade negotiations.
MUFG said in a note to clients it expected London and Brussels would strike a last-minute deal, but added: "Even if a trade deal is reached, upside potential for the pound will now be dampened by recent negative COVID developments in the UK."
Oil prices dropped on expectations of lower demand, with Brent 1.6% lower at $50.09.