By Jeremy Gaunt, European Investment Correspondent
LONDON, July 17 (Reuters) - Corporate earnings reports and economic news, both likely to be mixed, will keep financial markets in a fragile mood next week despite a surprisingly robust equity market performance over the past few days.
Britain's second-quarter gross domestic product -- the first from any G7 country -- comes out on Friday and should give a taste of the depth of the recession and possibly how far the industrial world has to go to get out of it.
There are also some concerns about the vulnerability of the bond market, the ability of central banks to withdraw from their liquidity-flush policies and even the possibility of ripples from financial trouble in the Gulf.
But it is the continuing earnings season that will grab most investors' attention.
Some of the results to date have been so pleasing to stock investors that MSCI's main world stock index was toying on Friday with its third or fourth highest weekly gain in its more than 20-year history.
This was down to solid performances from Goldman Sachs, JPMorgan and Intel.
But there have also been some disappointments, notably Google and General Electric. Citi had a good headline figure but set off some worries about rising credit losses.
"We are past concerns about the whole financial system imploding," said Julian Chillingworth, chief investment officer of UK investor Rathbones.
"But like the economy, we are going to get good news and bad news."
With currency and bond markets both shifting as risk appetite rises and wanes on a daily basis, this is likely to have an impact across all assets as the season continues.
Due to report results next week are the likes of Apple, Microsoft, Lockheed Martin, Coca Cola, McDonalds, Texas Instruments, Caterpillar, DuPont, Boeing and 3M.
There are also more banks -- including Bank of New York Mellon, Morgan Stanley, Wells Fargo, Capital One and American Express -- while Credit Suisse will be the first European financial giant to report.
So there are plenty of opportunities ahead for both types of surprises and the accompanying volatility.
DEERS IN HEADLIGHTS
Just how uncertain investors are about what to expect can be seen from the positioning of hedge funds, which appear to be betting against the March-June equity rally returning but not committing to a large retreat either.
In a report distributed to clients, Bank of America Merrill Lynch said that hedge funds it had tracked had been aggressively selling equities in early to mid-July.
But many funds are now only modestly underweight equities -- near their historical average, in fact -- and not betting on a huge meltdown.
This may reflect a consensus that, no matter what the earnings season brings, the worst is long past for equity markets and that they will not return to the depths of the first quarter.
Klaus Wiener, head of research at Generali Investments, reckons the issue for investors is how sustainable the gains since March are, not whether there is the chance of a retrenchment.
"The rally can probably go a bit further from here," he said, adding that the end of the year may see a pause as large government stimulus programmes wind down.
CLOUDS ON HORIZON
There are, in the meantime, a few issues swirling around that could rattle investors in the coming weeks, not least the approaching need for central banks to start rolling back on the policies they have launched to provide liquidity.
Minutes from the Bank of England's last policy meeting and congressional testimony from Federal Reserve Chairman Ben Bernanke during the week should give a clearer steer on where quantitative easing programmes are heading.
The key questions investors will want answered are why the BoE at its last meeting deferred making a firm decision on whether to extend QE beyond August, and whether the Fed will increase its bond purchases.
Some concerns have also been building about the vulnerability of hugely bought bond markets to a sell off -- both on the unwinding of QE and on good news from equity markets.
The U.S. 30-year Treasury has lost more than 4 full points this week as better-than-expected corporate earnings came in.
And a new headache could be building in the Gulf.
Regulators and bankers are grappling with the fallout from debt restructuring at Algosaibi and Saad Group, seen as the biggest blow to hit the Middle East since the start of the financial crisis.
Numerous Gulf Arab banks have said they face potential writedowns on loans made to the groups, and analysts at HSBC have estimated the total lending exposure of Saudi banks alone at $4-$7 billion. (Additional reporting by Swaha Pattanaik; Editing by Toby Chopra)