LDN - Business

Central bank hikers push world stocks near peak

[March 17, 2017] By John Geddie

LONDON (Reuters) - World stocks perched near a record high on Friday after a week when most of the world's biggest economies either raised rates, or signaled hikes, in a strong sign of confidence about global growth and inflation.

Investors turned their attention to a meeting of world finance chiefs in Germany starting Friday, where topics including economic reform, protectionism and exchange rates are expected to be on the agenda.

With Asian stocks on track for their best week since July, and European markets buoyant, Wall Street was set to open flat but close to all-time peaks earlier this month.

The U.S. Federal Reserve kicked things off this week with an interest rate hike on Wednesday, China followed with its own hike on Thursday, and then Britain and a European Central Bank policymaker hinted at higher rates.

The latter two came as somewhat of a surprise to markets with Britain's economic future in doubt as it exits the European Union, and the fragile single currency area still being treated with trillions of euros of central bank money-printing.

The euro briefly hit a five-week high and the bloc's bond yields and banking stocks climbed on Friday as comments from an ECB policymaker prompted investors to price in a high chance of a rate hike by year end.

"There's been a change of heart at the Fed in the last few weeks, the Bank of England's (Kristin) Forbes yesterday was flagging a rate hike and then we have the ECB talking about higher rates," said Richard McGuire, head of rates strategy at Rabobank.

"So when you connect the dots it almost appears as if central banks can sense that sentiment is sufficiently positive for them to start normalizing monetary policy."

It was the suggestion from the Austrian central bank governor that the ECB could raise rates before the end of its quantitative easing scheme - scheduled to run until December - that was the main focus during European trading.

Euro zone government yields rose broadly on Friday, with some benchmark German yields touching five-week highs. Money market rates, which fully price a rate hike for March 2018, showed an 80 percent chance of a December hike, up from 60 percent a week ago.

Banking stocks across the bloc also gained around 0.5 percent , outperforming the broader index which was little changed on the day.

The ECB currently has a negative deposit rate which acts as a tax on banks hoarding money with the central bank.

MSCI's all-country world stock index held near Thursday's all-time high on Friday, on track to end the week 1 percent higher.

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A man walks past an electronic board showing Japan's Nikkei average (top L), the Dow Jones average (top R) and the stock averages of other countries' outside a brokerage in Tokyo, Japan, January 26, 2017. REUTERS/Kim Kyung-Hoon

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4 percent and were on track to end the week with a 3.5 percent gain, its biggest increase since July.

TIGHTENING TREND

The euro jumped to a five-week high against the dollar to $1.0783 early on Friday, extending sharp gains seen after an election in the Netherlands saw a comfortable win by the sitting prime minister over a far-right rival.

By 1215 GMT, the euro had edged back to $1.0737, losing some ground against the U.S. dollar which was staging a tentative recovery from a five-week low hit earlier on Friday.

While the Fed raised interest rates on Wednesday as widely expected, it kept its original forecast of three rate hikes this year, disappointing investors who were expecting a bump up to four after a string of upbeat U.S. economic data.

Sterling rose for a third day running for the first time since mid-January and was perched at a two-week high after a decision by the Bank of England on Thursday to hold interest rates steady, while hinting it might raise them soon.

"The story in global markets over the past 24 hours has centered on a broad-based tightening of monetary policy conditions (and the perception of future tightening)," Chris Weston, chief market strategist at IG in Melbourne, wrote in a note.

In commodities, U.S. <LCOc1> and Brent crude <CLc1> climbed away from a 3-1/2-month low breached early this week, supported by a weaker dollar. [O/R]

Gold <XAU=> was up slightly at $1,229.50 an ounce. It was poised to gain around 2 percent for the week, its first in three, driven by the Fed's more moderate monetary policy stance.

(Additional reporting by Dhara Ranasinghe, editing by Toby Chopra and Pritha Sarkar)

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