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Hold your horses, market rise is a ‘dead-cat bounce’

Asian and European equity markets staged a rebound on Wednesday following a brutal selloff a day earlier; however, strategists are skeptical over the sustainability of the recovery, highlighting a slew of major risk events just around the corner.

"There's been nothing concrete to suggest risk appetite should recover. There are also still plenty of risks to come with the nonfarm payrolls this week," said Stan Shamu, market strategist at IG told CNBC.

Investors are expected to trade cautiously ahead of Friday's U.S. nonfarm payrolls report, which will provide more clues on the health of the world's largest economy, and could determine how the Federal Reserve will proceed with the tapering of its monthly asset purchases.

(Read more: How bad will the Nikkei meltdown get?)

Kazuhiro Nogi | AFP | Getty Images

Shamu says he is watching the U.S. dollar-Japanese yen pair for an indicator of investor sentiment, which does not suggest a return of a risk-on market.

"In the FX markets, there's no real dominant risk-on theme. The dollar-yen is still choppy. Without strong conviction in directional trade, the recovery could be a dead-cat bounce," he said. The yen strengthened 0.2 percent against the greenback in the Asian trading session.

Tuesday's biggest loser, Japan's benchmark Nikkei 225, traded up 1.3 percent higher on Wednesday after plunging over 4 percent a day earlier. South Korea's KOSPI index, meanwhile, gained 0.5 percent after retreating 1.7 percent on Tuesday.

European equities traded in positive territory on Wednesday, tracking Asian gains as well as responding to data showing that output in the euro zone economy expanded at its fastest pace since June 2011. The pan-European FTSEurofirst 300 index traded 0.3 percent higher, as European stocks halted a two-week selloff

(Read more: 'Fragile Five' face low risk of full-fledged crisis: Roubini)

Gains in the region tracked a bounce in U.S. stocks overnight, with the Dow Jones Industrial Average adding 0.5 percent and S&P 500 index climbing 0.8 percent.

Sean Darby, chief global equity strategist at Jefferies agreed the buying in Asian markets on Wednesday did not appear to be "genuine."

"Some of the markets were unjustifiably hit, markets did become oversold. Japan has been one case. But I don't think the buying were seeing today is genuine," he said.

Darby said markets are currently in a vacuum, trying to determine whether the global economy is strong enough to take shocks from emerging markets, and whether financial markets have run ahead of themselves. In this environment, investors are going to be heavily focused on economic data, he said.

Among key data points to watch over the next 24 hours include the U.S. ADP and non-manufacturing ISM reports, said Kathy Lien, managing director of FX Strategy for BK Asset Management.

(Read more: IMF calls for 'urgent action' amid EM crisis)

"Compared to the magnitude of yesterday's losses however, the relief rally was modest. So far, the move in currencies and equities represents nothing more than a dead cat bounce but that can change if tomorrow's ADP and non-manufacturing ISM reports surprise to the upside," Lien wrote in a note.

"The sell-off in U.S. assets on Monday was triggered by the sharp decline in the ISM manufacturing index but the U.S. is a service based economy so if non-manufacturing ISM increases, today's corrective rally could turn into a stronger recovery," she said.

—By CNBC's Ansuya Harjani. Follow her on Twitter: @Ansuya_H

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