* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
* European stocks, euro fall for fourth straight day
* Periphery euro zone bond yields rise
* Gold touches 1-month high
* Oil drifts lower
By Marc Jones
LONDON, May 30 European shares fell for a fourth
day running on Tuesday and the euro was battling to avoid a
similar fate, as the prospect of early Italian elections and
Greece's ongoing struggles nudged up the political temperature
The region's banks also came under pressure as Deutsche Bank
cut the sector to 'underweight', while sterling rebounded
having been knocked recently by signs that next week's UK
election is set to be closer than originally expected.
All this drove the traditional safe-haven assets of gold
and the Japanese yen higher and briefly pushed
yields low-risk German government bonds to their
lowest in more than a month.
Low inflation readings out of Spain and Germany,
as well as European Central Bank chief Mario
Draghi's commitment to continued stimulus in a
speech on Monday, helped keep the euro subdued at $1.116.
At the heart of the moves, however, were signs that
elections in Italy may now come as early as September, after the
5-Star Movement became the fourth big party to back a switch to
a proportional electoral system.
Italian shares remained flat having slumped 2
percent on Monday and southern euro zone bonds were also pushed
into the red again.
"We always knew Italy was going to come back into the
market's sights but I think people thought we would have a
longer stay of execution," said Rabobank currency strategist
"It does seem like the market will have to face worries
about elections and populism again over the summer. That of
course is a drag for the euro."
In spite of the weakness seen in the last couple of weeks,
the pan-European STOXX 600 index is still set to end
May in positive territory and near a 2-year high.
It will also be the index's fourth straight month of gains.
Investors however are reshuffling their portfolios as they
seek fresh catalysts following a surprisingly strong earnings
season and hot streak of euro zone macro economic data.
European equity strategists at Deutsche Bank downgraded
banks to 'underweight' saying the sector's valuations - which
have soared around 80 percent over the last year - were
no longer "compelling".
They also cut tech firms to neutral and JP Morgan's analysts
did the same to carmakers. At the same time Deutsche upgraded
construction and energy stocks to 'overweight' while JP Morgan
raised UK stocks to neutral saying they were at the
cheapest-ever levels on price price-to-book basis relative to
"We think UK is becoming interesting in the regional
allocation again," JPMorgan's strategists, led by Mislav
Matejka, said in a note to clients.
"(The) UK is a defensive market with high dividend yield. It
should perform better in the backdrop of potential softening in
activity indicators, lower inflation prints and continued
range-bound bond yields."
Greece's debt problems also continued to simmer after it
failed to reach a deal on its next installment of its bailout
programme earlier this month.
Greek Finance Minister Euclid Tsakalotos on Tuesday
dismissed reports in Germany's Bild newspaper, that the country
could opt out of receiving the new tranche if it does not
receive clearer debt relief terms.
The dollar index, under pressure over the past fortnight
from concerns over the Trump administration's difficulties,
gained around 0.2 percent in early trade in Europe.
In commodities, oil prices retreated around 40 cents a
barrel, as concerns lingered about whether the extension of
output cuts by OPEC and other producing countries will be enough
to support prices.
Global benchmark Brent fell 0.8 percent to $51.90
and U.S. crude futures slipped about 0.4 percent to
$49.60 a barrel.
Gold meanwhile rose to a one-month high of $1,270 an
ounce before it ran out of steam. It has risen almost five
percent over the last three weeks as stock markets and other
risk plays favoured by traders have stuttered.
Risk surrounding the closeness of Britain's upcoming
elections, the prospect of early elections in Italy and worries
over Greek debt were supporting gold, said Jeffrey Halley, a
senior market analyst at OANDA.
"The picture will get more muddy as the week goes on as we
have a lot of data from around the world coming in," he said.
For Reuters Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Reporting by Patrick Graham in London and Nithin ThomasPrasad
in Bengaluru; Editing by Richard Lough)