World stocks hold near 16-month highs after strong week

By Alistair Smout

LONDON (Reuters) - World stocks held near 16-month highs on Friday, set for a strong weekly gain, while the euro fell further after the European Central Bank's decision to extend its stimulus programme.

The MSCI World index was up 0.2 percent, on track for a gain of 2.7 percent for the week. The index was less than 0.1 percent below Thursday's peak, which was its highest level since August 2015.

On Wall Street, U.S. futures were flat.

European shares hit their highest level for 11 months, and were set for their best week since February, following the ECB's decision to trim the size of its bond-buying programme while also extending it for longer than many analysts had expected.

The ECB said it would reduce its monthly asset buys to 60 billion euros ($63.7 billion) as of April, from the current 80 billion euros, and extend purchases to December from March - three months longer than some analysts had forecast.

That dragged down two-year yields across Europe and sharply steepened the yield curve, a gift for banks that typically borrow short maturities and lend long.

European bank stocks pulled back on Friday, dropping 0.5 percent, but were still up nearly 10 percent for the week, with the sector set for its biggest weekly rise since December 2011.

One month on from November's U.S. presidential election, world stocks have gained nearly 4 percent, with Wall Street spurred to all time highs on hopes of higher growth and inflation as a result of President-elect Donald Trump's planned fiscal stimulus.

Analysts said that signs the ECB would continue to provide monetary support for as long as needed complemented the promise of fiscal stimulus, in a welcome cocktail for investors.

"Markets already excited by the prospect of a fiscal stimulus wave via a Trump election look in line to get more of both fiscal and monetary stimulus from next year," said Mike van Dulken, head of research at Accendo Markets.

"(That's) the best of both worlds for investors."

In all, Europe's STOXX 600 was up 0.6 percent.

The euro dipped for a second day, after Thursday's ECB announcement drove its biggest daily loss against the dollar since Britain's vote to leave the European Union in June.

It was trading around $1.0576, down nearly 0.4 percent against the dollar, having spiked as high as $1.0875 on Thursday in initial reaction to the ECB move.

The dovish tone of the ECB also saw a fall in euro zone borrowing costs, led by Southern Europe, though some said 2016 was the high water mark for monetary easing.

"You have to say central bank stimulus has peaked in 2016," said Charles Mackenzie, chief investment officer, fixed income, at Fidelity International. "The ECB are committed to keep quantitative easing continuing, and Bank of Japan has some way to run, so there's still a lot of QE going into 2017, but you have to say it has peaked."

The ECB's bond purchase changes came less than a week before the Federal Reserve's policy meeting next Tuesday and Wednesday.

Interest rate futures, implied traders saw a 98 percent chance the U.S. central bank would raise interest rates by a quarter point next week, and about a 50 percent chance it would raise rates by at least another quarter point by June 2017, according to CME Group's FedWatch program.

The dollar index, which tracks the greenback against a basket of six major rival currencies, was up 0.2 percent on the day at 101.32, up 0.6 percent for the week.

The dollar was up 0.6 percent at 114.72 yen, moving back toward last week's 10-month high of 114.83 yen.

Asian shares edged down on Friday but were on track for weekly gains. MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.2 percent, posting a weekly gain of 2 percent.

Japan's Nikkei stock index ended 1.2 percent up at its highest closing level since December 2015. The Nikkei earlier topped the 19,000-level for the first time in a year, as investors saw both the weak yen and prospects of Trump adopting reflationary policies benefiting Japan's major exporters.

Oil built on its gains after rebounding overnight on growing optimism that non-OPEC producers might follow the cartel's lead by agreeing to cut output. [O/R]

U.S. crude added 0.9 percent to $51.32 a barrel. Brent crude rose 0.7 percent to $54.23.

Spot gold was down 0.4 percent to 1,166.1 an ounce and was set for a weekly decline of 0.9 percent, pressured by the stronger U.S. dollar and expectations that the Fed will raise interest rates next week.

(Additional reporting by Abhinav Ramnarayan; Editing by Mark Trevelyan)