GLOBAL MARKETS-World shares enjoy vintage year, seen gaining more in 2014

Tue Dec 31, 2013 7:46am EST

* World stocks hover near six-year highs

* Equities expected to rally further in 2014

* Rise in bond yields to be tempered by deflation fears

* Euro near 2-year high vs dollar, may weaken in 2014

By Marius Zaharia

LONDON, Dec 31 (Reuters) - World stocks were ending 2013 close to six-year peaks on Tuesday and benchmark bond yields were poised for their first annual rise since 2009 as investors anticipated a further pick-up in global growth.

Ultra-easy monetary policies and an improving economic outlook have given equities a vintage year in 2013. Wall Street was on track for its best year since 1997 with a 29 percent gain, while Japan's Nikkei ended up 56.7 percent and European shares gained 16 percent.

MSCI's all-country world equity index was up 0.14 percent at 407.57 on Tuesday, having hit its highest since late 2007 at 407.65 on Monday.

The FTSEurofirst 300 index of top European shares was up 0.25 percent at 1,315.09 points, on course for its best year since 2009. U.S. stocks futures were flat to slightly positive.

Assets favoured by investors in economic downturns took a beating in 2013, with falling prices driving top-rated U.S. and German bond yields near their highest levels in around two years and gold limping towards its worst annual performance in three decades.

With bets that the economic recovery will continue even as the U.S. central bank steadily trims its bond-buying stimulus and that the euro zone will take more steps towards overcoming its debt crisis, investors look for more of the same in 2014.

"There is almost a complacency about next year and how well it could go," said Hans Peterson, head of asset allocation at SEB investment management. "There is still abundant liquidity even if the Fed started to taper and that is still the main theme ... Everything looks nice and easy right now."

Reuters polls show European stocks are expected to hit new highs in 2014, while Chinese, U.S. and other major stock markets are also seen posting solid gains.

Gold is expected to remain depressed, while benchmark bond yields are seen rising only slightly, despite investors' preference for riskier assets, the polls show.

Analysts do not foresee a sharp bond sell-off because inflation in major economies is expected to remain stubbornly low, while the European Central Bank and the Federal Reserve have pledged to keep interest rates low for a prolonged period.

While staying overweight in equities, Didier Duret, chief investment officer at ABN AMRO private banking, said 2014 "will be a good opportunity to ... buy some good quality bonds as yields pick up above 3 percent in the United States and above 2 percent in Germany."

The yield on the U.S. 10-year Treasury note, which sets the standard for global borrowing costs, has risen to almost 3 percent from 1.75 percent at the start of the year, but it is seen rising to only 3.35 percent in 2014.

Emerging markets have been a noted exception to the rally in equities. MSCI's EM Index fell 5 percent in 2013 on worries that cuts in global monetary stimulus could expose economic imbalances and as funds return to the rich world.

Russian stocks hit eight-day lows after two deadly attacks in less than 24 hours that raised security fears ahead of the Winter Olympics.

EURO

The euro is set to end 2013 close to its highest level in two years against the dollar, but a Reuters poll shows it is expected to reverse its upward trend next year as the continued soft stance of the ECB contrasts with the Fed's.

On Tuesday, the single currency inched down to $1.3776, still up more than 4 percent for the year.

The easing of the euro zone crisis and signs of a pick-up in economic activity even in the bloc's weakest states have offered strong support to the euro and brought Italian and Spanish debt yields to just over half their crisis peaks.

In recent days, a rise in money market rates due to thin year-end liquidity has given the shared currency extra impetus, but there are some expectations the ECB may react with new long-term liquidity injections into the banking system if that continues in 2014.

"One of the themes for 2014 is likely to be dangerously low inflation," said Marshall Gittler, head of global FX strategy at IronFX Global. "That's got to be a worry for the ECB and why they are likely to take more measures to loosen policy in 2014. That's the direct opposite of what the Fed is doing, which is why I expect the euro to weaken against the dollar."

The euro was quoted at 144.61 yen, down slightly on the day, having set a five-year high of 145.67 yen last Friday. The dollar was a tad lower at 104.96 yen, but remained on track for its biggest annual gain in 34 years, with the Japanese currency having been bowled over by the Bank of Japan's money-printing.

In the oil market, Brent crude held above $111 per barrel on Tuesday supported by slashed Libyan output and violence in South Sudan. U.S. oil futures were down 35 cents at $98.94.

Hopes for global growth meant copper traded around four-month highs, while aluminium dipped after climbing to two-month highs last session. Zinc looked set on Tuesday to be this year's best-performing industrial metal.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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