World stocks hit 1-year high as U.S. data saps dollar, bond yields

By John Geddie

LONDON (Reuters) - World stocks hit a new one-year high on Wednesday, while the dollar and benchmark government bond yields sank and precious metals rose after weak U.S. productivity data again pushed back expectations of a Federal Reserve rate hike.

Wall Street[.N] was expected to grind fractionally higher when it resumes, with jobs and housing market data on the agenda.

Europe's main bourses were struggling with modest 0.3-0.4 percent losses due to weak company results [.EU], although the MSCI's 46-country All World index remained positive after overnight Asian gains.

With the focus on signs of pressure in the United States economy, demand for bonds firmed again - a factor already highlighted on Tuesday by the Bank of England's failure to prise enough debt from investors to meet its revamped bond-buying plan..

U.S. Treasury yields dropped to 1.536 percent in Europe, while Germany's 10-year bonds yield fell 1.4 basis points to minus 0.16 percent as Berlin sold 4 billion euros of bond at a new record low average yield of -0.09 percent.

The 10-year UK gilt yield also sank to a record low of 0.54 percent in the wake of the BoE's bond buying issues.

"Central banks look increasingly accommodative and no one seems to be going against that trend ... which supports all asset prices," said Anton Heese, head of European rates strategy at Morgan Stanley in London.

"The growth prospects for the U.S. economy are probably weaker than many anticipate."

The bond moves had a clear impact on currencies, with the dollar index, which tracks the U.S. greenback against a basket of other top currencies, seeing its biggest drop in over a week, falling 0.65 percent to 95.559.

That in turn sent the euro up 0.6 percent to $1.1186, extending its recovery from Friday's one-week low of $1.1046. The yen climbed to 101.20 per dollar and even the recently buffeted UK pound made ground.

"The release of the third consecutive decline in quarterly U.S. productivity - the worst run since at least 1980 - does not bode well for the prospects for the dollar," Morgan Stanley head of currency strategy, Hans Redeker, said.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

GOOD AS GOLD

The Australian dollar advanced to a more than three-month peak of $0.7729, having been buoyed this week by Australia's relatively high yields and stronger investor risk appetite.

"Part of the Australian dollar's resilience is the lack of follow-through in pricing for a Fed hike in September, limiting the U.S. dollar's gains," analysts at Westpac said in a note. They recommended investors buy the Australian dollar.

The U.S. dollar's weakness gave gold a lift, with the precious metal gaining 0.9 percent to $1,352.26 an ounce.

Palladium jumped more than 7 percent to a 14-month high at one point as bets on lower prices were reversed after the metal, which is used in car catalytic converters among other things, broke above key chart levels. It surged nearly 20 percent last month in its biggest one-month rise in 8-1/2 years.

That may mean investors who had bet on lower prices could be exposed to heavy losses.

"You can talk about fundamental explanations -- strong car sales, a reduction in supply from Russia -- but those didn't happen overnight," Macquarie analyst Matthew Turner said.

Oil prices slipped for a second straight day as top producer Saudi Arabia revealed its output hit a record 10.67 million barrels per day last month. It came after data had also shown a surprise U.S. crude stockpile build. [O/N]

Brent futures fell as much as 1.5 percent to $44.30 per barrel before recovering to $44.95. U.S. crude also slipped 0.4 percent to $42.62, extending Tuesday's 0.6 percent decline.

Emerging market stocks showed little reaction to the crude moves as they rose for a fifth straight day with many EM currencies also strengthening following the dollar's sell-off.

MSCI's emerging market index hit a new one-year high as gains across Asia and other markets such as Greece and the Czech Republic helped extend its rise this month to over 3.5 percent.

(Additional reporting by Nichola Saminather in Singapore and Hideyuki Sano in Tokyo; Editing by Gareth Jones and Alexander Smith)