London: World stocks slipped after hitting a two-week peak yesterday while the euro fell broadly as investors grew cautious ahead of a slew of key US corporate earnings and details of tests on European banks' financial health.

The yen briefly slipped after Japan's ruling coalition lost its upper house majority in Sunday's election, putting the government's policies to deal with the country's massive debt at risk.

While second-quarter earnings are expected to come in strong, investors stayed cautious as companies, especially in Europe, could struggle because of government belt-tightening to combat high debt and budget deficits.

"The austerity measures and the slowdown in major markets will probably force companies to be a little bit cautious on their outlook and that will probably have an effect on the market in the short term," said Mark Bon, fund manager at Canada Life.

Equity index

The MSCI world equity index was down 0.15 per cent, having hit a two-week high of 280.79. The Thomson Reuters global stock index was down 0.1 per cent.

The FTSEurofirst 300 index also ticked down on the day while emerging stocks rose 0.1 per cent.

Wall Street was set for a weaker open with US stock futures falling 0.4 per cent. This week's key earnings include Alcoa, Intel, JP Morgan, Google, Bank of America, GE and Citi.

Thomson Reuters data shows earnings of S&P 500 firms are expected to grow 27 per cent in the second quarter from the previous three months, after expanding at a rate of 58.3 per cent in the January-March period.

So far, with 26 of 500 firms already reported, 69 per cent of earnings are coming above expectations.

The euro fell 0.6 per cent to $1.2570, pulling away from last week's two-month high as concerns about the effectiveness of stress tests on European banks prompted investors to trim long positions in the single currency.

Bund futures rose 47 ticks, drawing safe-haven bids.

The results of the stress tests are due on July 23.

"Only a test that takes into account all potential outcomes will convince the financial markets," Commerzbank said in a note.

Dire scenario

"Even though a default of a euro-area member state is very improbable, it should be part of the test scenario. After all, a dire scenario is a key element of a stress test, which aims, in the end, to give an impression of the worst possible outcome."

The yen stabilised at 88.60 per dollar, erasing losses made after Prime Minister Naoto Kan's Democratic Party of Japan lost its upper house majority less than a year after it swept to power promising change.

The Democrats still control the more powerful lower house, but they need help from other parties to push bills through the upper house as they struggle to end decades of stagnation in the world's No.2 economy and to cut the massive public debt.

The dollar rose half a per cent against a basket of major currencies.