Stocks, Bonds Rise Worldwide as Fed Fears Ease; Gold Sinks

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By Richard Hubbard

LONDON -- World shares hit their highest level in a week Friday and bonds and oil rose after two U.S. central bankers moved to calm fears of an early withdrawal of monetary stimulus.

Their efforts, combined with better economic data from Japan and an easing of credit concerns in China, lifted MSCI's world equity index 0.5 percent on Friday, putting it on course to reverse five weeks of losses.

But the gains were seen as limited with investors avoiding large bets on the final trading day of an unsettled quarter while pondering the impact of a broader shift in Fed policy.

"It's been a tough quarter, the easy game is up and markets have to reevaluate where they stand," said Wouter Sturkenboom, Investment Strategist at Russell Investments.

Global stock, bond and commodity markets have been notably volatile since Federal Reserve Chairman Ben Bernanke signalled last week the bank would soon cut the pace of its bond buying unless the economic recovery slowed.

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Two Fed policymakers came out Thursday to reassure investors that any winding down of stimulus was still some way off, though its ultimate course was set.

"The market is going to have to base its views about equities and currencies on actual economic growth rather than simply the fact that there's cheap money there," said Simon Derrick, chief currency strategist at Bank of New York Mellon (BK).

"I think that's a fundamental shift."

The Fed's signal that the era of cheap money is drawing to a close has already hit gold as its value as a hedge against inflation evaporates.

The metal dropped to a three-year low near $1,200 an ounce on Friday, putting it on course for its worst quarterly performance in over half a century.

Quarterly Close

The end-of-quarter maneuvering was cited behind a rise in the euro off a four-week low against the dollar to $1.3045, and helped the dollar rise against the yen by 0.5 percent at 98.92 yen.

The broad FTSE Eurofirst 300 index, which had opened higher in line with other world markets, pared the gains as end of quarter positioning took hold, leaving it on course to end June lower after a record 12 monthly rises.

Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan climbed 1.4 percent, pulling further away from an 11-month low and wiping out this week's losses. It was still down around 7 percent for the year.

Asia's rise followed Wall Street's rally on the Fed comments and Japanese data showing consumer prices stopped falling in May and labor demand reached a five-year high.

China's stock markets had also seen their biggest gains in two months after its central bank, which had let short-term borrowing costs spike to record highs, said it would ensure its policy supported a slowing economy.

Risk Outlook Changes

In the fixed income markets, European bonds shared in the more positive tone, with yields falling on core German debt and riskier Spanish and Italian paper.

But Patrick Jacq, European rate strategist at BNP Paribas, said investors would require higher yields in future in light of the Fed's policy shift. "Liquidity and credit risk assessment has changed since the Fed spoke about tapering off," he said.

In commodities, Brent crude oil futures climbed 29 cents to $103.11 on course for the first monthly rise in five months. Copper was flat but facing its biggest quarterly loss in almost two years, reflecting global growth concerns.