Year-end caution subdues shares, lifts yen

LONDON (Reuters) - A wave of risk aversion swept through global markets on Tuesday as general end-of-year caution and worries about Greece's future in the euro zone subdued shares and lifted the safe-haven yen and gold.

There was also a new 5-1/2 year low for oil prices as persistent worries about a global supply glut amplified the downward pressure of its pricing currency, the dollar <.DXY>, as it hovered near an 8-1/2 year high. [FRX/]

Wall Street, where the S&P 500 <.SPX> notched its latest record high on Monday, was expected to start on the back foot after Europe's stock markets spent their day firmly in red. [.N]

Britain's FTSE 100 <.FTSE>, Germany's DAX <.GDAXI> and France's CAC 40 <.FCHI> were down 1, 1.2 and 1.1 percent respectively before U.S. trading after a 1.6 percent drop for Tokyo's Nikkei <.N225> in its final session of 2014 had wilted Asia.

But Greece's bond yields , a proxy of the government's borrowing costs, steadied as investors took a relatively sanguine view of snap elections that are likely to empower a party seeking to flout international bailout terms. [GVD/EUR]

The left-wing Syriza party, which opposes the European Union/International Monetary Fund bailout , has said it wants to abandon the many of the drastic spending cuts that are central to Greece's rehabilitation program.

"The developments in Greece have prompted some concerns among global investors, at least in the near term, which is boosting safe-haven demand for the yen," said Lee Hardman a FX strategist at Bank of Tokyo Mitsubishi.

"It's probably fair to say Greece could leave the euro and it would have less of an impact than in 2012, but it would be dangerous," he said.

But if market reaction is anything to go by, investors see the threat posed by Greece to the euro zone as far better contained than the first time around. The region has set up a new banking watchdog this year and the European Central Bank is scoping out government bond buying.

Italy, the bloc's third biggest economy with some of the biggest difficulties, saw its 10-year borrowing costs fall to a record low of under 1.9 percent at auction on Tuesday as Spanish market yields also hit new lows.

The euro , held just above a 2-1/2 year low at $1.2160 as more lackluster bank lending data and fresh evidence of deflation taking hold in Spain and Italy further bolstered the case for ECB action.

OIL SLUMP

Oil prices, the other big focus for world markets at present, extended their sharp recent falls in early European trading as they dropped below $57 per barrel for the first time since May 2009.

Having officially halved in price in the last six months, Brent crude fell 98 cents to $56.90 after hitting $56.74 earlier in the session, while U.S. crude fell 77 cents to $52.84 a barrel.

An industry group, the American Petroleum Institute, is scheduled to release its inventory report later in the day ahead of U.S. Department of Energy data on Wednesday.

In a cautious currency market, the yen made sharp gains against both the dollar and euro as investors sought the traditional safety of the Japanese currency.

As U.S. trading gathered momentum it was up almost one percent at 119.45 yen to the dollar as the dollar itself held just below an 8-1/2 year high against six of the world's main currencies. <.DXY>

Europe's benchmark safe haven, the 10-year German Bund , was slightly softer on day but was heading for its biggest annual fall in yields since 2008. It was last at 0.546 percent, roughly a quarter of the 2.19 percent of U.S. Treasuries .

Gold also nudged higher but the dollar's broad-based strength meant more pain for other commodities. Copper edged down to $6,280.25 a tonne, after falling to its lowest level in four-and-a-half years this week.

Worries about China's economy added downward pressure. Growth in China's manufacturing sector likely slowed to a 18-month low in December, a Reuters poll showed.

The yo-yoing on Russia's markets also continued as signs of fresh intervention from the central bank lifted the rouble 3 percent and Ukraine, some of whose bonds Russia owns, said it expected to get overdue IMF loans by the end of next month.

(Additional Reporting by Lisa Twaronite in Tokyo; Editing by Jon Boyle/Ruth Pitchford)

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