By Jamie McGeever
LONDON (Reuters) - World markets struggled for direction on Monday, with renewed strength in the yen, government bonds and gold pointing to heightened caution among investors, but a sharp rebound in European stocks suggesting a pent-up appetite for risk.
As the U.S. first quarter earnings season kicks off and G20 finance chiefs gear up for talks in Washington later this week on the sidelines of the IMF Spring meetings, investors initially chose to play safe on Monday.
Europe's main indices fell as much as 1 percent, Japan's yen rose to a 17-month high against the dollar and Germany's 10-year bond yield hit a one-year low.
The dollar's fall to as low as 107.61 yen prompted the Japanese government to warn that it could take steps to weaken the yen's exchange rate. The yen's push higher, and data showing a 9.2 percent fall in Japan's core machinery orders in February, helped drag the Nikkei 0.44 percent lower.
But a jump in Italian bank shares ahead of a meeting in Rome between the country's largest lenders, the Treasury and the central bank to set up a rescue fund then lifted European financials and broader indices.
"A bout of risk aversion took hold in markets last week ...Uncertainty is evident again on Monday," said Jasper Lawler, markets analyst at CMC Markets.
Europe's FTSEuroFirst 300 index of leading shares (FTEU3) was up 0.6 percent, Germany's DAX (GDAXI) was up 0.9 percent, France's CAC 40 (FCHI) rose 0.6 percent and Britain's FTSE 100 (FTSE) was up 0.2 percent. All had been sharply lower earlier.
European stocks have fallen for the last four weeks, and another down week would mark their worst run in almost three years.
European financials were up around 2 percent (SX7P), with Italian bank shares now up 13 percent from last week's three-year low.
Japan's Nikkei (N225) ended down 0.4 percent, but other Asian markets drew support from lower-than-expected Chinese consumer price inflation data which fuelled investor hopes that Beijing will keep monetary policy loose.
MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) was flat in late trading while Chinese shares were higher (CSI300) <.SSEC>.
YEN IN FOCUS
The greenback's slide against the yen prompted warnings from officials in Tokyo and put investors on alert for direct yen-selling intervention, though many believed Japan would stay its hand.
Japan's top government spokesman, Chief Cabinet Secretary Yoshihide Suga, said on Monday that recent currency moves were one-sided and speculative and that the government would take steps as needed.
With the Federal Reserve seen as being more cautious on hiking interest rates than some had expected, the dollar wallowed close to lows notched last week.
The dollar was down around 0.2 percent against the yen at 107.89 yen
"Last week was the yen's week, and this morning, to the extent that anything is happening, is the yen's morning too," Societe Generale's currency strategy team wrote in a note to clients.
The yen has appreciated around 10 percent so far this year.
In bond markets, Germany's 10-year yield hit a one-year low of 0.075 percent
Analysts said that bond redemption and coupon payments this week totalling a hefty 55 billion euros will bolster demand for bonds that is already supported by the European Central Bank's recently increased quantitative easing scheme.
The weaker dollar helped lift spot gold to its highest in nearly three weeks. Gold
Oil prices edged down as investors took profits after crude soared more than 6 percent on Friday. U.S. crude futures (CLc1) edged down 0.3 percent to $39.60 a barrel, while Brent crude (LCOc1) was down about 0.2 percent at $41.85.