Iraq unrest drives up oil; equities slip

By David Gaffen and Marc Jones

NEW YORK/LONDON (Reuters) - Escalating violence in Iraq drove oil higher and sent stocks lower on Friday, putting a global equity index on track for its first weekly loss in five weeks.

Wall Street was little changed, but U.S. averages were set for their first loss in four weeks, while European shares were set to interrupt eight weeks of gains. The MSCI All World Index fell 0.2 percent and is down 0.5 percent for the week.

Despite the decline in riskier assets, benchmark U.S. bond prices fell, pushing yields slightly higher. Sterling surged on Friday after the Bank of England hinted at an interest rate rise this year.

Financial markets' focus was on the violence in Iraq where Sunni Islamist militants have surged out of the north this week to menace Baghdad and want to establish their own state in Iraq and Syria. President Barack Obama on Thursday threatened U.S. military strikes in Iraq against the insurgents.

"The market was looking for an excuse to take profits after a rally to new highs and tensions in Iraq gave investors an opportunity to trim their positions," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

Oil rose, with Brent crude at one point touching a nine-month high of $114.69. It was last up just a few cents to $113.05. U.S. crude touched an intraday high of $107.68 before pulling back, up 19 cents to $106.71. The benchmark is up about 4 percent this week.

"There was a big market reaction and then the IEA (International Energy Agency) said it did not see a risk to supplies so the volatility is reflecting this," said Olivier Jakob at Petromatrix consultancy.

The IEA played down fears over the possible sudden loss of oil exports from Iraq in its monthly oil market report.

The S&P 500 gained 1.59 points or 0.08 percent, to 1,931.7 and the Nasdaq Composite added 10.38 points or 0.24 percent, to 4,308.01.

Bank of England Governor Mark Carney said late Thursday British interest rates could rise sooner than markets expect. Markets had previously been expecting a rate hike in the first quarter of 2015, and the FTSE 100 was down nearly 1 percent.

It would make the BoE the first of the four major central banks to raise interest rates. Sterling neared a five-year high against the dollar at $1.6951 on Carney's comments and hit a 1-1/2 year high of 1.2525 euros. The gap between 2-year UK and German yields ballooned to its widest in four years.

(Additional reporting by Anirban Nag, Julia Payne and Christopher Johnson; Editing by Nick Zieminski)