GLOBAL MARKETS-U.S. bond yields near two-year highs; stocks edge up
* World equity markets set for worst week since late June
* Dollar supported by rise in U.S. Treasuries yields
* Oil steady as Egypt unrest sparks supply fears
By Wanfeng Zhou
NEW YORK, Aug 16 (Reuters) - U.S. bond yields traded near two-year highs on Friday as investors worried the Federal Reserve will start scaling back stimulus next month, while world share indexes edged higher but were still headed for their biggest weekly fall in almost two months.
The rise in yields on U.S. Treasuries drove up the dollar against major currencies. The dollar briefly weakened after data showed U.S. consumer sentiment declined in August while housing starts and permits rose less than expected in July.
U.S. shares were little changed, a day after the largest decline on Wall Street in nearly two months set major indexes on course for their first back-to-back weekly declines since late June. European shares eased from two-year highs set earlier this week.
Treasuries have been roiled along with German, British and other government bonds as the United States and euro zone economies appear to have finally found a more solid footing, increasing expectations that yields will continue their recent rise.
"Some of the likelihood of a September taper continues to strengthen and you've also seen a lot of stable news coming out of the European zone. That may provide that window of opportunity for the Fed to start in September," said Sean Murphy, a Treasuries trader at Societe Generale in New York.
The Federal Reserve's next policy meeting will be held Sept. 17-18, and investors are keenly waiting to see if the U.S. central bank will begin to pare back its $85 billion in monthly bond purchases.
U.S. Treasuries prices extended a rout that has sent longer-dated yields to their highest level in two years. The bond market has undergone a sharp selloff since the Fed started talking about paring back its bond purchases.
The benchmark 10-year yield has risen from about 1.6 percent at the start of May. The 10-year note was last down 9/32 in price, with its yield at 2.7976 percent. Yields rose as high as 2.823 percent on Thursday, the highest since August 2011.
A Reuters poll released on Wednesday showed a majority of economists expect the Fed to reduce bond purchases at its Sept. 17-18 policy meeting, with a consensus expecting that the U.S. central bank would reduce purchases by $15 billion initially.
On Wall Street, stocks have come under pressure as corporate revenue growth has disappointed even as companies' bottom-lines have hit the mark. From Wal-Mart and Gap to Macy's and McDonald's, chains that cater to middle- and lower-income Americans are feeling the pinch of an uneven economic recovery.
"We haven't seen the revenue growth the market was anticipating," said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey.
"We are unlikely to see a large-scale correction in the market right now, but it certainly is losing the momentum that took it to strong highs earlier this year," he said.
MSCI's world equity index, which tracks shares in 45 countries, edged up 0.2 percent but was set for its biggest weekly drop since late June as talk of an early cutback in the Fed's bond purchases resurfaced.
The Dow Jones industrial average was up 7.89 points, or 0.05 percent, at 15,120.08. The Standard & Poor's 500 Index was up 0.37 points, or 0.02 percent, at 1,661.69. The Nasdaq Composite Index was up 11.29 points, or 0.31 percent, at 3,617.41.
Europe' broad FTSE Eurofirst 300 index of top companies rose 0.3 percent.
Emerging currencies, though, struggled, with India's rupee hitting a record low beyond 62 per dollar, bringing its year-to-date losses to 11 percent. The rupee fell on concerns the central bank's latest measures to defend the currency could be a step toward outright capital controls. The Indonesian rupiah also tumbled to a four-year trough.
MSCI's broad emerging equities index shed 0.3 percent.
The dollar rose 0.2 percent to 97.54 yen, while the euro slipped 0.2 percent to $1.3325.
Expectations of a global economic recovery fueled demand for industrial metals, with copper reaching a 10-week peak of $7,420 a tonne, while zinc has rallied to a five-month high of $1,990 a tonne.
Precious metals like gold and platinum have gained as well, though they could be threatened if the Fed did wind down its stimulus. Gold hit a two-month high of $1,373.09, with platinum and palladium also at two month highs.
Brent crude futures for October were up 33 cents at $109.93 a barrel. U.S. oil for September rose 49 cents to $107.82.
Concerns that violence in Egypt could affect the Suez Canal, a conduit for up to 3 million barrels per day of oil and a vital seaway for bulk carriers, helped drive Brent to a four-month high on Thursday.
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