European stocks pause before Greek vote on bailout terms

By Marius Zaharia

LONDON (Reuters) - Yields on peripheral bonds dipped, while European stocks and the euro held their breath on Wednesday as fractious parties in the Greek parliament prepared to vote on EU-prescribed austerity measures needed to unlock a third bailout.

Lawmakers from Prime Minister Alexis Tsipras' Syriza party and their allies argued behind closed doors about whether to back the reforms. Tsipras defended the deal, saying it was better than the alternative of being forced out of the euro zone.

The parliamentary vote is seen as the key hurdle to a final agreement for the bailout, which could end -- at least temporarily -- months of increased uncertainty, volatility and frequent risk aversion in financial markets.

The pan-European FTSEurofirst 300 index fell 0.1 percent to 1,578.71, having risen for five days in a row until Wednesday. Yields on German Bunds, top-rated assets often sought in times of uncertainty, dipped 2 basis points to 0.82 percent. The euro, which has lost 1.5 percent this week, was little changed at $1.1001.

But 10-year yields on Spanish, Italian and Portuguese bonds, seen as vulnerable to spillovers from the Greek crisis, fell 2-3 basis points to 2.06 percent, 2.08 percent and 2.75 percent respectively.

"There's much uncertainty surrounding Greece," said Rabobank rate strategist Richard McGuire. "The probability does favour a passage of the necessary legislation on the austerity measures given the opposition support for Tsipras but going forward there are questions about their ability to pass legislation on reforms."

An International Monetary Fund study published on Tuesday showed that Greece needs far more debt relief than European governments have been willing to contemplate so far.

CHINA GROWTH

China's second quarter gross domestic product grew an annual 7.0 percent, steady with the previous quarter and slightly better than analyst forecasts. Fixed-asset investment and industrial output growth also beat economists' forecasts.

But Shanghai's benchmark composite index fell 3 percent, and the CSI300 index of the largest listed companies in Shanghai and Shenzhen dropped 3.5 percent.

Further stimulus is still expected after the quarter ended with a savage correction that shaved about 30 percent off share market value since last month, before Beijing's support steps stemmed the freefall for a while.

"Stock investors at present care more about what the government policy towards the market is, whereas the connection between the economy and the market has somehow loosened," said Zhang Qi, senior stock analyst at Haitong Securities in Shanghai.

Oil prices dipped as the market prepared for a gradual increase in supply after Iran signed a nuclear deal with six world powers under which sanctions imposed by the United States, the European Union and the United Nations are to be lifted in exchange for curbs on Tehran's nuclear programme.

Brent crude was down 18 cents from its previous settlement, trading at $58.33 a barrel. U.S. futures were down 9 cents at $52.96.

The dollar was slightly higher against a basket of currencies at 96.68.

A Congressional testimony by Federal Reserve Chair Janet Yellen later in the day will be closely watched for any hints regarding the timing of a U.S. interest rate hike, particularly after a surprise fall in U.S. retail sales on Tuesday.

(Additional reporting by Lisa Twaronite in Tokyo and Emelia Sithole Matarise in London; Editing by Catherine Evans)