European stock markets have rallied after sharp losses earlier in the week, with London’s leading share index gaining almost 2%.

The FTSE 100 index of the most valuable companies listed in London rose 138 points to 7,279 on Wednesday, still well below its all-time closing high of 7,779 on 12 January.

In New York, where the market rout began on Monday, the Dow Jones industrial average appeared on track for a second day of recovery, up about 381 points at its peak. The Dow also hit an all-time high last month of 26,616. But a late decline as US bond yields moved higher again saw a reversal by the close, and the Dow ended down 19.42 points at 24,893.35.

Chris Beauchamp, the chief market analyst at the spread-betting company IG, said the market remained unpredictable, but added: “The current course of events has mirrored previous market selloffs – brief panic, steady recovery and then a return to the longer-term rally.”

Donald Trump tweeted to admonish investors for the share sell-off on Monday, claiming they had misread positive economic figures.

“In the ‘old days’, when good news was reported, the stock market would go up. Today, when good news is reported, the stock market goes down. Big mistake, and we have so much good (great) news about the economy!” the US president said

The turnaround from a dramatic slump on Monday was supported by Charles Evans, the president of the Chicago Federal Reserve, who said US interest rates should not rise before the middle of the year.

The global run on shares earlier in the week, ahead of the Dow rally on Tuesday, wiped $4tn off stock market values and pushed down oil and base metals prices. It was triggered by fears that central banks would be forced to react to galloping growth across the industrialised world by hiking interest rates, effectively ending the era of cheap borrowing that has underpinned a decade-long recovery.

Evans said he expected US GDP to grow steadily by between 2.5% and 2.75% this year, with growth slowing over the next two years as the boost from Trump’s tax cuts wears off.

“With the data I see today, my policy strategy would be to keep policy on hold until midyear or so in order to assess the incoming inflation data. If we get to that point, and have more confidence that inflation is moving up sustainably, then further rate increases would be warranted,” he said.

While markets have steadied, investors are still far more nervous than they were just a few days ago. The VIX index, which is called Wall Street’s “fear gauge” because it measures how much volatility investors expect in the future, is currently at 21, about double where it was two weeks ago. It spiked above 50 early on Tuesday.

This article was written by Phillip Inman and Nick Fletcher, for The Guardian on Wednesday 7th February 2018 19.35 Europe/London © Guardian News and Media Limited 2010