*

Asian stock markets: https://tmsnrt.rs/2zpUAr4

*

Euro down a fraction as France heads for hung parliament

*

Stocks underpinned by hopes for Sept Fed rate cut

*

Week features US CPI data, Fed's Powell, corporate

earnings

(Adds quote in paragraphs 5-6, updates prices throughout)

By Nell Mackenzie and Wayne Cole

LONDON/SYDNEY, July 8 (Reuters) - World stocks held just

below record highs on Monday, with sentiment slightly cautious

as growth woes in China and the prospect of political deadlock

in France took the shine off optimism about a U.S. interest rate

cut as early as September.

European shares reversed early falls, but U.S.

stock futures were broadly flat and Japan's Nikkei

slipped 0.32% while the Chinese blue-chip index was

off 0.9%.

China's bond yields rose as the central bank launched new

money market operations to increase its market liquidity.

Mainland China and Hong Kong stocks ended lower, with a key

index logging its fifth straight losing session. Investors were

disappointed by a lack of policy stimulus measures amid a weak

economic recovery, rising geopolitical tensions and foreign

outflows.

In France, a leftist alliance unexpectedly took top spot

ahead of the far right in Sunday's election, a major upset that

was set to prevent Marine Le Pen's National Rally from running

the government.

The weaker than expected showing for the far right was

something of a relief for investors, though they also have

concerns the left's plans could unwind many of President

Emmanuel Macron's pro-market reforms.

"Market uncertainty has somewhat decreased following the

election, as the prospects for significant increases in public

spending are low, given that neither left-wing nor far-right

parties secured an absolute majority," said Bruno Schneller,

managing director at Erlen Capital Management.

"Nevertheless, a political risk premium is likely to

persist, and any rebound in the market is expected to be

short-lived," said Schneller.

The single currency steadied at $1.0837, having

been as high as $1.0843 on Friday when a soft U.S. jobs report

undermined the dollar.

The euro was up 0.2% against the yen at 174.54.

The dollar stood at 161.04 yen, just off its recent

top of 161.86.

The closely-watched France-Germany 10-year government bond

yield spread dropped one basis point (bp) to around 64 bps, its

narrowest since June 13, but then widened in later trading.

"French government bonds are currently not attractive," said

Schneller.

France's sovereign credit outlook is worsening amid a high

and increasing debt ratio, substantial fiscal deficits, and

rising funding costs, he added.

Europe's region-wide STOXX 600 and the CAC 40

in Paris were both up over 0.4% after early falls.

Across the pond, U.S. equity futures steadied.

S&P 500 futures and Nasdaq futures were both

nearly flat. Earnings season kicks off later this week when

Citigroup ( C/PN ), JP Morgan and Well Fargo all

report.

Investors took Friday's jobs report as adding to the case

for a September rate cut from the Federal Reserve, with futures

now implying a 77% chance of a move.

Markets also have 53 bps of easing priced in for this year,

up from around 40 bps a month ago.

"Three-month payroll growth fell sharply to +177k from +249k

as previously reported, driven by 111k of downward revisions,"

wrote analysts at Goldman Sachs.

"We continue to expect the FOMC to deliver its first cut in

September, followed by quarterly cuts to a terminal rate of

3.25-3.5%."

In London trade, 10-year U.S. Treasury yields

were up around 4 bps at 4.31% on Monday, having been as high as

4.49% early last week.

Fed Chair Jerome Powell will have a chance to offer his

outlook when he appears before Congress on Tuesday and

Wednesday, while several other Fed officials are speaking this

week.

The main economic event will be the U.S. consumer price

report on Thursday, where headline inflation is expected to slow

to 3.1%, from 3.3%, with the core steady at 3.4%.

German inflation data are out the same day, while China

releases consumer prices and trade figures this week.

In commodity markets, gold fell from near one-month

highs in earlier trading to stand down 0.8% at $2,372 an ounce.

Oil prices slipped as the market waited to see what impact

Hurricane Beryl might have on supplies from the Gulf of Mexico.

Brent fell 81 cents to $85.73 a barrel, while U.S. crude

dropped 95 cents to $82.21 per barrel.