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GLOBAL MARKETS-Stocks recover, euro up after safety flight

Published 07/19/2011, 07:02 AM
Updated 07/19/2011, 04:08 AM

* Stocks regain some lost ground

* Wall Street set for gains

* Euro, euro zone bond markets firmer

* Investors eye euro zone, U.S. debt debate

By Jeremy Gaunt, European Investment Correspondent

LONDON, July 19 (Reuters) - World stocks clawed back some recent losses and the euro firmed on Tuesday as investors paused from their selloff of riskier assets triggered by debt crises in the euro zone and United States.

Wall Street also looked set to open higher.

Gold, however, continued to attract safe-haven investment flows, rising for the sixth session in a row to around $1,604 an ounce .

Italian and Spanish bonds, now in the maelstrom as euro zone debt problems spread, firmed slightly after 10-year yields vaulted six percent on Monday.

Investors were focusing on a euro zone summit to be held on Thursday, hoping it will complete a second bailout for Greece in an attempt to stop the sovereign debt crisis from seriously infecting larger countries, notably Italy and Spain.

Stakes are high with the scope for serious market ructions if Europe's leaders fail to provide a definitive plan.

"Things are coming to a head. This is a political crisis just as much as a financial crisis. We need some real leadership," said Justin Urquhart Stewart, director at Seven Investment Management.

Risk aversion among investors has also been stoked by the approaching U.S. Aug 2 deadline on the federal borrowing limit. Political leaders in Washington are still at an impasse.

Investors for the most part appear to be assuming that the U.S. debt ceiling will be lifted and a default averted, with the 10-year Treasury yield camped comfortably below 3 percent.

World stocks as measured by MSCI were up half a percent and still have gains of around 1.3 percent for the year despite a plethora of financial, political and natural crises from Japan to Europe, the United States and North Africa.

European shares rose, helped along by technology shares that got a boost from an upbeat statement from IBM . The FTSEurofirst 300 gained three-quarters of a percent.

"We can expect a relatively strong (stock) rebound if we get a political solution to the debt crisis on Thursday, a solution that would please the market," said Christophe Brule, president of Entheca Finance. "Without an adequate solution, the market could drop another 10-15 percent."

Japan's Nikkei closed down 0.85 percent.

EURO STEADY

The euro rose broadly with investors torn as they balance the debt concerns on both sides of the Atlantic.

"Euro/dollar is trapped between the euro zone debt crisis on one side and questions surrounding the U.S. debt ceiling on the other, and the market doesn't want to take on any major positions," said You-Na Park, currency strategist at Commerzbank in Frankfurt.

The euro was at $1.4165 .

On euro zone bond markets themselves, safe-haven German bond prices fell and Italian and Spanish bonds prices rose slightly, with some profit-taking on the core debt.

"You can argue that the summit isn't really focusing on the matter in hand to a degree. There's a risk we could get some disappointment in terms of help for Spain and Italy if the crisis gets worse on Thursday," one bond trader said.

"Spain especially is at very pronounced yield levels. Systemic risk is definitely the danger into the end of the week."

(Additional reporting by Kirsten Donovan, Naomi Tajitsu, Brian Gorman, Blaise Robinson and Emelia Sithole-Matarise; Written by Jeremy Gaunt; editing by Stephen Nisbet)

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