Global Markets: 'Gradual and patient' Fed sends stocks to new highs, dollar dips

By Jemima Kelly

LONDON (Reuters) - Global stocks scaled record highs on Friday, capping their best week in over two months as the dollar stayed close to nine-month lows, with bets on a gradual U.S. Federal Reserve rate hike path and hopes for a strong earnings season boosting risk appetite.

Wall Street was set for a broadly flat open, with shares in JP Morgan and Wells Fargo dipping in pre-market trade after the U.S. banks released mixed earnings reports, offsetting some of the central bank-fuelled optimism.

After a scare at the end of last month, when stock markets skidded on the view that the era of easy money might be coming to an end across the globe, investors have been soothed by a run of more dovish comments from central bankers.

Dallas Fed President Robert Kaplan on Thursday advocated a "gradual and patient" approach to further tightening after two hikes so far this year, saying he first wanted to see more evidence that inflation is heading back up to the Fed's 2-percent goal.

Fed Chair Janet Yellen also said on Thursday that the central bank's further rate hikes could be gradual, given persistently low inflation despite an improving economy.

European shares were poised for their best week since late April as investors piled back into equities, though moves on indexes on Friday ahead of the U.S. open.

The pan-European STOXX 600 index inched up 0.1 percent, adding to earlier gains on stock markets in Asia that took MSCI's world stock index to an all-time high.

"Yellen's cautious testimony - and the dovish tones of her deputies - may have given risk-taking a new lease of life," said BNY Mellon currency strategist Neil Mellor in London.

"Perhaps with the exception of Monday's figures from China, there appears to be nothing on next week's schedule that may seriously alter the market's current view of the world."

As the dollar dipped towards a nine-month low reached on Thursday, high-yielding currencies such as the Australian dollar and Mexican peso benefited from the risk-on mood, with the latter touching 14-month highs as the VIX index, a key gauge of asset volatility, drifted lower.

REASSURED MARKETS

The recent caution from central bankers has also taken the sting out of a sell-off in the bond market, which had been gathering steam over the past few weeks in the euro zone on rising expectations that the European Central Bank is set to wind down its asset purchase programme.

The bloc's benchmark German 10-year yield fell some 3 basis points when European trading started on Friday to 0.50 percent, moving away from an 18-month high hit earlier this week of 0.583 percent.

"(The Fed comments) add to our conviction that no further Fed hike should be expected for the rest of the year, which should prove reassuring for markets concerned about excessive tightening risk globally," Mizuho's head of euro rates strategy Peter Chatwell said.

Earlier, Japan's Nikkei added 0.2 percent, poised for a weekly rise of just over 1 percent. MSCI's broadest index of Asia-Pacific shares outside Japan advanced 0.3 percent to its highest level in two years.

The euro was up 0.2 percent at $1.1410 and was set to end the week flat.

The ECB is keen to keep its asset purchases open-ended rather than setting a potentially distant date on which bond-buying will stop, to retain flexibility in case the outlook sours, three sources familiar with the discussion told Reuters.

The Canadian dollar remained near its strongest in over a year after the Bank of Canada this week raised interest rates for the first time since 2010, with further tightening expected this year.

In commodities, oil prices edged higher and were on track for solid weekly gains following positive demand signals, production issues in Nigeria and a reported decline in stocks.

Brent crude futures, the international benchmark for oil, were up 43 cents at $48.85 per barrel.

Gold was up 0.3 percent at $1,217.32 an ounce, heading for more than half-percent gain for the week

(Additional reporting by Nichola Saminather and Shinichi Saoshiro in Singapore, and John Geddie, Saikat Chatterjee and Kit Rees in London; Editing by Gareth Jones)