Global stocks set for weekly drop, bruised by China's yuan weakness

By Jamie McGeever and Alistair Smout

LONDON (Reuters) - European stocks were poised for their worst week in six on Friday, under pressure from a falling oil price, as global markets struggled to regain poise after China's surprise currency devaluation on Tuesday.

Markets rose briefly on Friday, with European stocks and the euro both supported in early deals after Greek parliament approved a third multi-billion euro bailout deal.

However, investors were underwhelmed by weaker-than-expected euro zone economic growth figures, and market sentiment remained fragile.

Oil slumped to its lowest since March 2009 and emerging market currencies - notably the Turkish lira and South African rand - slid to historical lows.

The FTSEurofirst 300 index of leading European shares gave away early gains to trade down 0.2 percent 1040 GMT. The Euro STOXX 50 <.STOXX50E> traded down 0.7 percent, weighed down by a 1 percent fall in oil and gas shares.

Before Wall Street's open, U.S. stock futures were down 0.2 percent.

European stocks were poised for a weekly loss of 3 percent, their biggest loss in six weeks. A close of 3.5 percent on the week would be the biggest decline this year.

European equities have been under pressure from a falling yuan, which has hit auto stocks, miners and luxury firms. However, some said the drop had gone too far.

"We think it plausible that European equity markets have reacted too negatively to the 4 percent depreciation of the yuan," strategists at Morgan Stanley said in a note.

"Any indications that China may introduce a wider stimulus programme could shift sentiment from risk-off to risk-on as

investors consider the potential for better global growth."

Earlier on Friday, the Greek parliament voted to approve the country's third financial rescue by foreign creditors in five years. Prime Minister Alexis Tsipras still faces a confidence vote later this month.

Meanwhile, official figures showed that the German and Italian economies expanded more slowly than expected in the second quarter. The French economy didn't grow at all.

OIL NOT SO SLICK

In commodities trading, crude oil futures extended sharp losses that pushed oil prices to levels not seen since early 2009, when the financial crisis was wreaking havoc on markets.

U.S. crude fell to a new 6 1/2-year low of $41.35 a barrel, as a big increase in U.S. stockpiles intensified worries over a growing global glut. It was last down 0.1 percent at $42.14 a barrel. Brent was flat at $49.21.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.1 percent, ending the week down 2.7 percent, its biggest weekly loss since early July.

Japan's Nikkei stock index <.N225> fell 0.4 percent, and was down about 1 percent for the week.

The People's Bank of China set its midpoint yuan rate at 6.3975 per dollar before the market opened, firmer than the previous day's close of 6.3990. The yuan also strengthened in spot market trading , changing hands at 6.3918 late in the Asian session.

But over the week, the yuan lost nearly 3 percent after the central bank's devaluation on Tuesday and pledge to allow market forces to play a greater role in setting the exchange rate.

"We just need to see if the yuan is going to stay halfway stable over the next few days, then confidence is going to come back," said Markus Huber, senior equity sales trader at Peregrine & Black. "If China calms down, we're going to have the potential for a rate hike in the U.S. on the table again, and that could be the next drag on markets."

The dollar was largely steady against its main rivals on Friday. It fell 0.2 percent against the yen at 124.15 yen , off its two-month high of 125.28 on Tuesday. The euro rose 0.2 percent to $1.1167 and is up 1.8 percent this week.

The greenback came under pressure this week as China's devaluation curbed expectations the Federal Reserve's long-awaited interest rate increase would come as early as its Sept. 16-17 meeting. But strong U.S. retail sales data on Thursday backed the view that the Fed was ready to hike.

The yield on 10-year U.S. Treasury notes was roughly steady on the day - and the week - at 2.17 percent , having fallen to a near four-month low of 2.04 percent on Wednesday.

Gold was flat on the day but up 2 percent on the week, its best weekly performance in three months .

(Reporting by Jamie McGeever, Alistair Smout in London, editing by Larry King; To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting; for the MacroScope Blog click on http://blogs.reuters.com/macroscope; for Hedge Fund Blog Hub click on http://blogs.reuters.com/hedgehub)