European stock and bond markets steadied on Tuesday before a euro zone leaders summit to discuss the Greek debt crisis while a further fall in Chinese shares reminded investors of other dark clouds on the horizon. Oil recovered some ground after Monday's stomach-churning selloff prompted by Greeks' overwhelming rejection of the terms of a bailout deal and the Chinese stock markets turmoil. Euro zone leaders meet in Brussels, awaiting proposals from Greek Prime Minister Alexis Tsipras as his country's banks rapidly run out of cash and the European Central Bank tightened the noose on funding. Failure to reach a deal would increase the likelihood of Greece leaving the single currency. The Euro STOXX 50 index of euro zone blue-chip shares rose 0.2 percent after falling 2.2 percent on Monday. Germany's DAX index rose 0.3 percent while Italy's FTSE MIB was up 1.4 percent. "The rest of Europe is ring fenced from what's going on in Greece. We would see further volatility with a Grexit, but not as severe as we saw in the past," said James Butterfill, global equity strategist at Coutts. Yields on German debt, which fell on Monday as investors sought the low-risk asset, dropped further. Ten-year yields fell 4.8 basis points to 0.73 percent. However, yields on government bonds from Italy, Spain and Portugal, the countries seen as most vulnerable to contagion from Greece, also fell. Italian 10-year yields, which rose on Monday, were down 3.3 bps at 2.34 percent. German Bund futures opened up sharply after the ECB on Monday raised the discount it charges on collateral that Greek banks must present in exchange for funds. Sources said the move was largely symbolic as the amount Greek banks can borrow is capped. "It is difficult to say whether this soft reaction is because the market is not too concerned about Grexit now or whether the headlines over the course of the day have led the market to believe that a deal will be forthcoming eventually," said RBC strategist Peter Schaffrik. The euro fell 0.3 percent to $1.1005 but held well above Monday's low of $1.0967. The dollar rose 0.4 percent against a basket of currencies. Many asset managers believe a Greek exit from the euro can still be avoided while others say the ECB would step in to limit contagion. "It is a drift lower for the euro with things likely to get interesting if it drops below $1.0970," said Jeremy Stretch, head of currency strategy at CIBC World Markets. "The markets are reasonably relaxed at this stage because they believe the ECB will step in to take action to contain any contagion, should Greece step out of the union." CHINA FALLING Earlier, Asian shares dropped after further losses in China despite the authorities there unveiling a series of measures at the weekend intended to halt a slide of almost 30 percent since mid-June. China's CSI 300 index of the biggest listed companies in Shanghai and Shenzhen closed down 1.8 percent, having fallen more than 5 percent earlier in the day. MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.5 percent, though Japan's Nikkei rose 1.3 percent after a sharp fall on Monday. Oil prices rose. Brent crude, which fell more than 6 percent on Monday, rose 53 cents a barrel to $57.07, though analysts said the outlook remained weak. "Macroeconomic headwinds are rising - be it in the form of the collapse in the Chinese stock market, Greece's potential exit from the euro zone or a stronger dollar. So downside risk to Brent flat price persists," Energy Aspects said on Tuesday. Gold, which has failed to attract much of a safe-haven bid in the latest flare-up over Greece, dipped to $1,168.15 per ounce. Source: Reuters
