Markets regain ground but still edgy over Greece

TOKYO (Reuters) - Markets recovered some ground on Monday after last week's heavy losses, but investors remained wary about the euro zone despite world leaders calling for Greece to stay in the monetary union and for Europe to balance austerity with growth.

Leaders of G8 major industrialized nations meeting at the weekend vowed to take steps to combat financial turmoil and revitalize a global economy threatened by Europe's debt crisis, but they offered no specific prescription for debt-crippled Greece which holds fresh elections next month.

Concerns about contagion from Greek political turmoil have been magnified by deepening banking sector instability in Spain, and investors are expected to stay risk-averse at least until the June 17 Greek election makes clear whether the nation will stay or leave the euro, traders and analysts said.

Currently many market players see the main scenario as Greece staying in the euro and European leaders making some compromises to maintain financial lifelines for the country.

"There's a lot of talk and no substance. Until you get some certainty about Greece and the fear of contagion eases, the volatility is here to stay," said Savanth Sebastian, an economist at CommSec.

MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> rose 0.3 percent, after falling as much as 3 percent to a 2012 low on Friday. It fell around 6 percent in the week, its worst weekly performance in nearly eight months.

Japan's Nikkei stock average <.n225> gained 0.3 percent, after shedding 3 percent on Friday to log a seventh straight week of losses, its longest such losing streak since the third quarter of 2011. <.t/>

"Today's move is merely a rebound from sharp losses on Friday and it doesn't have momentum to rise strongly. The G8 outcome lacked the punch to give much incentive for markets," said Hirokazu Yuihama, a senior strategist at Daiwa Securities in Tokyo.

"Markets for now are unlikely to slide by the same magnitude as seen last week, supported by value hunters, but a lack of direction makes the risk averse," he said.

The technology sector <.miapjit00pus> of Asia's share index by far outperformed its peers with a 1.5 percent gain, helping to lift Korean equity market <.ks11> above a key chart level as blue chips recovered.

GROWTH AND FISCAL AUSTERITY

The euro inched up 0.1 percent to $1.2796, moving away from a four-month low of $1.2642 reached on Friday, which was not far from its trough of 2012.

But reflecting investor nerves, the yen, widely perceived as a safe haven, hovered near its three-month high against the dollar of 79.001 yen hit on Friday. The yen stood at 79.14 on Monday.

With a steadying euro, spot gold added 0.2 percent to $1,594.89 an ounce, after rising more than 1 percent on Friday.

The G8 suggested mounting global support for highly indebted euro zone economies to be allowed to take less strict austerity measures and put more priority on stimulating growth. Reports also suggested Greece's anti-austerity forces could soften their stance to avoid a catastrophic outcome for the nation.

Yuji Saito, director of foreign exchange at Credit Agricole Bank in Tokyo, said the G8 comments were positive, but it did not offer a buying incentive for the euro.

"Markets are shifting their focus to an upcoming European summit on May 23 and comments about the Greece election," he added.

The May 23 summit will focus attention on whether European leaders can strike a new balance between growth and the fiscal reforms deemed vital to fixing the euro zone's debt crisis and regaining market confidence in the single currency.

French President Francois Hollande said on Saturday he would make proposals for eurobonds at the May 23 informal meeting.

Recent opinion polls show Greek voters are returning to the establishment parties that negotiated its bailout, offering potential salvation for European leaders.

Alexis Tsipras, the Greek leftist who polled strongly in the inconclusive May 6 election, says he wants talks to keep Greece in the euro. He is looking to forge ties with likeminded European figures such as Hollande.

G8 leaders also raised the pressure on Iran, signaling their readiness to tap into emergency oil stockpiles if tougher new sanctions on Tehran strained supplies.

Oil prices recovered on Monday, with U.S. crude up 0.3 percent at $91.77 a barrel, after falling more than 1 percent on Friday. Brent crude, which closed at its lowest in 2012 on Friday, rose 0.6 percent at $107.76 a barrel.

"FEAR INDEX" RISING

As risk aversion intensified on Friday, the CBOE VIX Volatility index <.vix>, a gauge of investor anxiety that measures expected volatility in the Standard & Poor's 500 index <.spx> over the next 30 days, rose 2.5 percent to close above 25 for the first time since mid-December.

Asian credit markets stabilized on Monday on short covering after the G8 meeting, but underlying sentiment was defensive, traders said. The spread on the iTraxx Asia ex-Japan investment-grade index widened by a couple of basis points, but off its widest level since early January touched on Friday.

(Additional reporting by Umesh Desai in Hong Kong and Ian Chua in Sydney; Editing by Mark Bendeich)

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