* Chinese stocks fall 5 percent, hitting emerging markets
* Earnings help lift European stocks 0.4 percent
* Dollar, yen gain slightly
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, although the mood
failed to carry over into Europe.
European shares were higher in early trade, lifted by
positive earnings news despite losses in China that have
sometimes heralded a global stock market retreat.
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 1.3 percent, after it hit a 10-month high on Tuesday.
European shares gained, however, partly as a result of
positive results from Bayer <BAYG.DE> and drugmaker
Sanofi-Aventis <SASY.PA>.
The pan-European FTSEurofirst 300 <> index of top
shares was up 0.4 percent.
Some investors have nonetheless been 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 toour
overall equity exposures," U.S.-based money manager GMO said in
a note.
FLIGHT TO QUALITY
The dollar and yen gained broadly while perceived higher
risk currencies came under heavy selling pressure, partly as a
result of the Shanghai sell off.
U.S. data on Tuesday also showed a slide in consumer
sentiment during July [], encouraging investors to
take profits from a sharp risk rally that has driven currencies
such as the Australian dollar higher, along with the euro.
The dollar was up 0.1 percent against a basket of major
currencies <.DXY> and the euro lost about the same to $1.4166
<EUR=>.
"We have had a very strong rally in risky assets and the
market has been looking for reasons to take profit," said
Michael Klawitter, senior currency strategist at Dresdner
Kleinwort.
Euro zone government bonds gained traction on the Chinese
stock losses.
The two-year Schatz yield <EU2YT=RR> was at 1.356 percent,
off an early high of 1.393 percent, while the 10-year Bund
yielded <EU10YT=RR> 3.427 percent, also off the session high of
3.511 percent.
(Additional reporting by Jessica Mortimer; editing by Patrick
Graham)
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