GLOBAL MARKETS-Treasury yields at 2-year high; stocks head for weekly loss
* World equity markets set for worst week since late June
* Dollar supported by rise in U.S. Treasuries yields
* Wall Street slip as retailers fall; EM currencies struggle
By Wanfeng Zhou
NEW YORK, Aug 16 (Reuters) - U.S. bond yields rose to two-year highs on Friday as investors worried the Federal Reserve will start scaling back stimulus next month, while world share indexes 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 lower, 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 ended higher after hitting two-year highs 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 25/32 in price, with its yield at 2.8564 percent.
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' earnings have hit Wall Street's estimates. 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.
Nordstrom became the latest department store chain to miss revenue estimates, prompting it to cut its full-year sales and profit forecasts. Shares fell 3.6 percent to $57.19.
"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, was little changed on Friday 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 dropped 32.33 points, or 0.21 percent, to 15,079.86. The Standard & Poor's 500 Index fell 5.61 points, or 0.34 percent, to 1,655.71. The Nasdaq Composite Index gained 1.67 points, or 0.05 percent, to 3,607.79.
Europe' broad FTSE Eurofirst 300 index of top companies rose 0.3 percent.
Emerging currencies 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 0.5 percent.
The dollar rose 0.3 percent to 97.62 yen, while the euro slipped 0.1 percent to $1.3328.
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 $1,374.80, with platinum and palladium also at two month highs.
U.S. oil futures fell as traders brushed off the threat of supply disruptions from tropical storms in the Gulf of Mexico and took profits ahead of the weekend, but Middle East concerns kept Brent futures steady.
Brent crude futures for October were up 41 cents at $110.01 a barrel. U.S. oil for September rose 3 cents to $107.36. Although Egypt is not a major oil producer, investors are wary that the unrest there could spread around the Middle East, which pumps more than a third of the world's oil.
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