By Amanda Cooper and Dhara Ranasinghe
LONDON, Sept 25 (Reuters) - Global stocks headed for their best weekly performance since early August on Friday, as AI euphoria and the prospect of an improvement in Middle East energy supplies won out over surging bond yields for now.
Oil prices retreated as traders weighed up the possibility of a truce between the United States and Iran. Negotiators are exploring a phased path out of the war that would involve reopening the Strait of Hormuz, sources close to the talks
told Reuters. [O/R]
Slightly lower oil prices brought some respite to bond markets that have been hit hard by the inflationary concerns unleashed by higher energy prices.
"Markets tend to buy the rumour on signs of better news coming from the Middle East," said Nordea chief market strategist Jan von Gerich. "But there is no quick resolution and the weekend is approaching so we could see some caution."
Despite easing, Brent crude remained above $100 a barrel, keeping government bond yields near recent peaks. Japan's 10-year bond yield touched 3.115%, a level last seen in 1996.
Inflation fears have also bolstered bets on multiple Federal Reserve rate hikes after last week's increase, putting the dollar on track for a second straight week of gains.
European shares edged higher and were headed for a weekly rise, with the pan-European STOXX 600 index up 0.6%, while U.S. stock futures also traded higher in a positive sign for the Wall Street open later.
MSCI's world stock index was a touch firmer on the day and set for its best weekly performance since early August.
Chinese President Xi Jinping is in Washington for talks with President Donald Trump, though beneath the fanfare there has been scant evidence of breakthroughs on thorny issues over AI, trade, Taiwan or the Iran war.
RISK ASSETS UNDER THREAT
Risk assets are under threat from a dramatic selloff in global bonds, as inflation worries and fiscal strains push investors to demand ever-higher returns, particularly on long-dated debt.
"The world's bond markets are screaming, and ignoring it could prove very expensive," said Nigel Green, CEO of deVere Group, a financial advisory firm.
"Once risk-free rates sit above 5% in the world's largest economy, every asset on the planet has to justify its price against that. Equities, property, private credit, emerging market debt — nothing's immune."
The benchmark 10-year Treasury yield was a touch higher on the day at around 5.17%, having surged 20 basis points in just two days to a new 19-year peak of around 5.22%. That was the biggest two-day gain since April last year when Trump's Liberation Day tariffs spooked markets.
Thirty-year US bond yields were steady at around 5.47%, having surged 17 bps over the past two days to hit their highest since 2004. A rise in US borrowing costs has pushed up mortgage rates to 7%, hamstringing the housing market.
Euro zone bond yields were lower on Friday but poised for their seventh weekly rise.
"We have seen some violent moves in bonds and those moves have gone further than the economic conditions justify," said Nordea's von Gerich, adding that he saw room for yields to move lower.
Investors continue to position for further rate hikes from major central banks.
Five out of the Group of 10 most influential central banks have raised rates this month, and the remainder have either signalled a hike is coming, or, at the very least, warned about rising inflation.
Norway raised rates on Thursday and Sweden's Riksbank signalled it was likely to follow suit by the year end.
And expectations for further Fed tightening are keeping the dollar firm.
While the dollar index was a touch lower on Friday, it was set for a second week of gains and has this week hit the highest since late July.
The dollar, however, lost 0.4% against the yen to 158.23, retreating from a three-week peak, after Japan's Finance Minister Satsuki Katayama said Trump raised concern about yen weakness during a summit with Japanese Prime Minister Sanae Takaichi earlier this week.
(Reporting by Amanda Cooper and Dhara Ranasinghe in London and Stella Qiu in Sydney. Editing by Kirsten Donovan and Mark Potter)
