Global shares, bonds rally as markets count on patient Fed

By Wayne Cole

SYDNEY (Reuters) - Asian shares scaled a two-year top on Thursday as investors wagered policy tightening in the United States would be glacial at best, lifting Wall Street to record peaks and lowering bond yields almost everywhere.

The star performer was the Canadian dollar, which rocketed to 11-month highs after the country's central bank hiked rates for the first time in seven years and left the door wide open to further moves.

Yet the overall mood was one of relief that Federal Reserve Chair Janet Yellen had not sounded more hawkish in her appearance before Congress, a green light for risk taking.

Sentiment got another boost when China reported upbeat data on exports and imports for June, helping the blue-chip CSI300 index up 0.4 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.2 percent to its highest since May 2015.

Australia's main index jumped 1 percent, while South Korea rose 1.1 percent to a record after its central bank kept policy easy to support consumer spending.

Japan's Nikkei was restrained by a firmer yen and managed only a 0.15 percent gain.

On Wall Street, the Dow rose 0.57 percent, while the S&P 500 gained 0.73 percent and the Nasdaq 1.10 percent. The rate-sensitive S&P 500 real estate index jumped 1.3 percent, its biggest gain in about four months.

Equities were underpinned by a drop in bond yields as Yellen sounded cautious on inflation and noted the Fed would not need to raise rates "all that much further" to reach current low estimates of the neutral funds rate.

"The market did perceive a greater degree of anxiety over inflation - at the margin," said Westpac's U.S. economist, Elliot Clarke. "To our mind, this is unlikely to get in the way of another hike this year."

"Two further hikes in 2018 will likely be justified by conditions. However, the case for additional hikes thereafter is nowhere near being made."

Indeed, markets doubt even that modest tightening will ensue and imply only a 50-50 chance of a rise by December.

OH CANADA

Treasuries rallied in reaction, with yields on two-year notes falling to three-week lows, as did bonds in Europe and Asia.

The odd man out was Canada, where yields hit their highest since late 2013 after the Bank of Canada raised rates a quarter point saying the economy no longer needed as much stimulus.

The Canadian dollar notched its biggest percentage gain since March 2016 and was last trading near one-year peaks at C$1.2740.

The main loser was the U.S. dollar which slipped to 112.97 on the yen, while the euro edged up to $1.1437. Against a basket of currencies, the dollar was pinned just above nine-month lows at 95.602.

The drop in U.S. yields benefited gold, which pays no interest, and nudged the precious metal up 0.3 percent to $1,223.67 and away from its recent trough of $1,204.45.

Oil prices flatlined as producer club OPEC said it expected demand for its crude to decline next year as rivals pump more, pointing to a market surplus in 2018 despite efforts to tighten supply.

Brent crude futures were up 1 cent at $47.75 a barrel, while U.S. crude was unchanged at $45.49.

(Editing by Shri Navaratnam)