European markets rise before Yellen speech, Greek vote

By Marius Zaharia

LONDON (Reuters) - European stocks rose and bond yields fell on Wednesday, with investors optimistic that the Greek parliament will approve a vital third bailout, although the moves were limited before a speech by Federal Reserve chief Janet Yellen.

The dollar (DXY) was little changed against a basket of major currencies, trading at 96.64 before Yellen's congressional testimony, which might offer more hints about the timing of an interest rate hike after a surprise fall in U.S. retail sales on Tuesday.

Investors will be keen to see to what extent the prolonged uncertainty over Greece's debt crisis and the slump in Chinese stocks have affected the Fed's outlook. U.S. stock futures indicated a marginally higher open on Wall Street.

"The latest developments in Greece and China have wider ramifications as they could affect the Federal Reserve's decision to normalize policy," JPMorgan (NYSE:JPM) Asset Management global strategist, Thushka Maharajat, said.

"We maintain our view of a September rate increase, but that view has become more balanced. It is predicated on Europe ... containing risks from the Greek crisis."

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

The pan-European FTSEurofirst 300 index (FTEU3) was up 0.2 percent to 1,583.77, having risen for five days in a row. The euro , which has lost 1.5 percent this week, was up 0.1 percent at $1.1017.

Ten-year yields on Spanish , Italian and Portuguese bonds, seen as vulnerable to Greek contagion, fell 5-8 basis points to 1.99 percent, 2.03 percent and 2.72 percent respectively.

Bonds were the biggest movers among European assets, the difference being made by daily European Central Bank buying under its trillion euro stimulus program. Yields on German Bunds fell 4 basis points to 0.80 percent.

"Investors are betting that despite all the opposition from his own party, (Greek Prime Minister Alexis) Tsipras will get sufficient votes to pass the reforms today," said Nick Stamenkovic, a bond strategist at RIA Capital Markets.

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

CHINA GROWTH

China's second quarter gross domestic product grew an annual 7 percent, flat on the previous quarter and slightly higher than analyst forecasts. Fixed-asset investment and industrial output growth also beat economists' forecasts.

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

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

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

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 program.

Brent crude was down 41 cents from its previous settlement, trading at $58.10 a barrel. U.S. futures were down 35 cents at $52.69.