* Chinese stocks fall 5 percent, hitting emerging markets
* Wall Street set for losses at open
* Earnings lift European stocks 1 percent
By Jeremy Gaunt, European Investment Correspondent
LONDON, July 29 (Reuters) - A late sell-off on Shanghai's
stock market depressed emerging market stocks on Wednesday and
took Asian shares off multi-month peaks, but the mood failed to
carry over into Europe which rose sharply on corporate earnings.
Wall Street looked set for a weak start.
European shares were up more than 1 percent, bucking the
global trend, after positive earnings news from Spain's biggest
bank Santander <SAN.MC> and chemical group Bayer <BAYG.DE>.
This came despite losses in China, which have sometimes
heralded a global stock market retreat although the market tends
to be highly volatile and can recover quickly.
Chinese stocks <> fell 5.0 percent in heavy turnover,
posting their biggest daily drop in eight months and ending a
five-day liquidity-driven rally. At one point, stocks were close
to 8 percent lower.
Investors were concerned that major Chinese banks may start
to restrict lending to cool various booming markets. Chinese
stocks, for example, had risen close to 89 percent this year
before Wednesday's fall.
That led MSCI's broad emerging market stock index <.MSCIEF>
down 1.2 percent, after it hit a 10-month high on Tuesday.
Some investors have begun suggesting that the global equity
market rally that began in March is not immediately sustainable.
"Given the speed and strength of the recent rally, we are
tending toward a wait and see approach before adding to our
overall equity exposures," U.S.-based money manager GMO said in
a note.
FLIGHT TO QUALITY
The dollar gained broadly on Wednesday, recovering from
recent losses while investors took profits on currencies such as
the euro and Australian dollar which have risen sharply
recently.
As well as the fall in Shanghai, risk appetite was knocked
by data showing a drop in U.S. consumer sentiment.
"The dollar is recovering as investors move out of riskier
assets and into safe havens, while commodity-heavy currencies
are all falling," said CMC Markets analyst James Hughes.
The euro was down 0.3 percent against the dollar to $1.4133
<EUR=> after rising as high as $1.4305 on trading platform EBS
on Tuesday, its highest since early June.
The dollar index, which measures its performance against a
basket of currencies, rose 0.4 percent to 79.141 <.DXY>.
Euro zone government bonds gained traction on the Chinese
stock losses.
The two-year Schatz yield <EU2YT=RR> was at 1.353 percent,
off an early high of 1.393 percent, while the 10-year Bund
yielded <EU10YT=RR> 3.429 percent, also off the session high of
3.511 percent. Bond yields move inversely to prices.
(Additional reporting by Jessica Mortimer; Editing by Ruth
Pitchford)
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