By Richard Hubbard
LONDON (Reuters) - Diverging fortunes in the global economy knocked emerging markets from a two-week high on Tuesday and sapped recent gains in European shares, while Japan's Nikkei index hit its highest level in five weeks on the yen's weakness.
U.S. shares were expected to take support from a report on U.S. factory orders due at 1400 GMT and seen rising by 2 percent.
Overall world equities were little changed with most investors content to wait for U.S. jobs data later in the week to review bets on when the Federal Reserve may begin trimming the bond buying that has been underpinning markets.
"It's really all about the data later this week, especially the U.S. employment report, where the market be looking for further clues on Fed tapering," said Michael Hewson, senior market analyst at CMC Markets.
Surveys on factory activity in June, showing the United States, Japan and the UK on track for modest growth while the euro zone stagnates and China slows, prompted some adjustments.
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The slowdown in China and other developing countries sent MSCI's benchmark emerging equity index <.MSCIEF> down 0.5 percent although Chinese shares rose for the third day.
In Europe, the broad FTSE Eurofirst 300 index fell 0.6 percent by midday after a strong start to the new quarter on Monday. The index remains some 8 percent off its 2013 peak, which marked a five-year high.
But while data showed a drop in new car sales in Germany, Europe's largest auto market, a more stable outlook overall is expected to encourage the European Central Bank to leave its rates unchanged at a policy meeting on Thursday.
USEFUL LINKS:
Global equity in 2013: https://bsmedia.business-standard.comlink.reuters.com/jyb29s
Commodities in 2013: http://link.reuters.com/jyb29s
ASIA RISES
Earlier Asian markets were lifted by strong gains in Japan and a rise in Australian shares after its central bank left interest rates at a record low and suggested there was room for further easing.
Japan's Nikkei index closed 1.8 percent higher to finish above 14,000 for the first time in five weeks as blue-chip exporters gained on the Bank of Japan's robust Tankan business report and the yen's slide against the U.S. dollar.
The dollar has risen to a four-week high against its Japanese counterpart at 99.91 yen, though it stayed below the key 100 yen level with many investors wary of taking fresh positions ahead of the jobs data and a U.S. holiday on Thursday.
The euro was steady at $1.3052, off last week's trough of $1.29845, its lowest since early June.
DEBT MIXED
In fixed markets, Spanish and Italian debt yields extended recent falls, but bailout worries drove up Portuguese and Greek yields.
Finance Minister Vitor Gaspar, architect of Portugal's bailout response, resigned on Monday, while Greek debt yields surged after Reuters reported Athens has only three days to convince lenders it should get its next tranche of aid.
With Greece due to repay 2.2 billion euros of bonds in August, yields on 10-year Greek bonds were up 20 basis points to 11.24 percent.
Among commodities, Brent crude rose above $103 a barrel, extending gains to a second day due to concerns about supply disruptions in the Middle East and Africa.
Gold gained for a third straight session to $1,267.20 an ounce, recovering from last week's three-year lows.
(Editing by Ron Askew/Ruth Pitchford)