July 21, 2011 / 1:43 AM / 7 years ago

Stocks off highs, euro up before EU summit

LONDON (Reuters) - World stocks held below a 1-1/2 week high on Thursday after a disappointing services sector survey in the euro zone while the euro ticked up as investors awaited details of a Franco-German deal on a Greek bailout at a European summit later.

The dollar fell across the board as U.S. lawmakers and the White House struggled to reach a deficit-reduction deal to raise the government’s $14.3 billion debt ceiling and avoid a default.

Growth in the 17-nation euro bloc’s manufacturing sector virtually ground to a halt in July while its dominant service sector grew at its slowest rate in 22 months as demand from abroad fell and the region’s debt crisis weighed on minds at home.

Germany and France will present details of their accord later on Thursday to euro zone leaders who are trying to prevent fears of a Greek default from poisoning access to the bond market for bigger states such as Italy and Spain.

“There are huge expectations something will be done...The big disappointment could come from how quickly they can implement things. They can agree principles but implementation will take a long while,” said Peter Schaffrik, strategist at RBC Capital markets.

The MSCI world equity index .MIWD00000PUS was steady on the day, having hit a 1-1/2 week high earlier. European stocks fell a quarter percent .FTEU3 while emerging stocks .MSCIEF lost 0.15 percent.

Earlier a survey of manufacturers showed activity in China’s manufacturing sector shrank for the first time in a year in July, although the figures had little sustained impact after the latest GDP report showed overall growth remained robust.

U.S. crude oil rose 0.1 percent to $98.48 a barrel.

Bund futures lost 17 ticks. The Greek/German 10-year yield gap narrowed by 57 basis points on the day to 1,414 bps while the equivalent Italian spread tightened by nine basis points to 276 bps, its lowest in a week.

The euro was up 0.2 percent at $1.4248.

“In the last 48 hours the market has been positioning for another flurry of risk appetite and getting back into the high-yielding currencies like the euro,” said Derek Halpenny, currency strategist at Bank of Tokyo-Mitsubishi UFJ.

“But I think that could be short-lived. Anything that comes out (from the summit) needs to be really convincing to limit the risk of contagion to Italy and Spain which has materialized in the last few weeks.”

The dollar .DXY fell 0.2 percent against a basket of major currencies with the focus remaining on the progress on debt talks.

There have been glimmers of hope in Washington this week for a possible compromise based on a broad deficit-cutting proposal from a bipartisan group of senators that could stave off default and salvage America’s triple-A credit rating.

But the stakes are so high and the divide so wide between the Democratic president and his Republican rivals that negotiations could go down to the wire early next month.

Additional reporting by Emelia Sithole-Materise; Editing by John Stonestreet

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