* World stocks flat, just off six-month high

* Bond yields rising on expectation of more policy
tightening

* German, U.S. yields at multi-month high

* Oil near 4-year highs on supply concerns

* Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh

By Tommy Wilkes

LONDON, Sept 25 (Reuters) – World stocks struggled to make
headway on Tuesday after another round of U.S.-China tariffs
kicked in and investors’ nerves were frayed by rising
expectations of central bank rate hikes and oil prices near
four-year highs.

Following falls across Asian share markets, European bourses
opened firmer, with a pan-European index up 0.2 percent
. MSCI’s main index of world stocks
traded flat, though it is holding just under six-month highs hit
earlier this month.

Beijing and Washington have imposed new tariffs on each
other’s goods and Chinese Vice Commerce Minister Wang Shouwen on
Tuesday accused the United States of putting “a knife to China’s
neck”.

Neither side appears ready for compromise, worrying
investors the conflict is fast-becoming a protracted battle that
will chill investment and hurt global trade.

The developments pushed Wall Street lower on Monday though
futures indicated a slightly higher open.

“Markets have tried hard to shrug off the implications of an
escalating trade spat on global trade and growth but this is
becoming harder with each fresh round of tariffs and will slowly
but surely take its toll on investor sentiment,” Jasper Lawler,
head of Research at London Capital Group, said.

There are other big worries for investors too, not least the
timing and pace of central bank policy tightening.

While the U.S. Federal Reserve will almost certainly hike
rates for a third time in 2018 this week, European Central Bank
President Mario Draghi on Monday raised expectations the euro
zone will also start to normalise policy over the coming year by
referring to ‘relatively vigorous’ underlying inflation and
brisk wage growth.

That pushed German 10-year bond yields to four-month highs
above 0.5 percent, while yields also rose across the
euro bloc with money markets now pricing a rate rise by the ECB
next September. That’s a marked change from a few weeks ago when
a move was only expected by December 2019.

U.S. 10-year Treasury yields too rose, touching a new
four-month high above 3.10 percent.

Goldman Sachs analysts noted a change in how markets were
viewing rising bond yields — having considered them a signal of
improving growth and hence a positive for equities, higher bond
yields were becoming attractive in their own right, they said.

“With U.S. 10-year bond yield above 3 percent and U.S. real
yields close to 1 percent, the risk especially to equities from
rates is now back in focus,” they told clients in a note.

“We think the bar for investing in risky assets is rising as
returns on safer assets are becoming more attractive.”

Currency markets were mostly quiet as investors watched from
the sidelines before the Fed meeting.

The euro eked out a small rise to $1.177 after
rising above $1.18 after Draghi’s comments on inflation while
the dollar index was flat having inched off two-month
lows hit at the end of last week.

The dollar’s three percent reversal since mid-August has
given some respite to emerging markets in recent days but MSCI’s
emerging equity index slipped 0.4 percent while most
currencies also weakened, anticipating a hawkish tone from the
Fed.

The yuan was a touch weaker as most investors expect Chinese
authorities to not follow the Fed in raising rates.

Oil prices are also becoming a concern. They surged more
than three percent on Monday after Russia and OPEC leader Saudi
Arabia resisted pressure to raise crude output to offset the
expected hit to supply from U.S. sanctions against Iran.

Brent crude futures rose to as high as $81.69 a
barrel on Tuesday, a level not seen since November 2014.

(Additional reporting by Sujata Rao in London; Shinichi
Saoshiro in TOKYO, Editing by William Maclean)

(c) Copyright Thomson Reuters 2018. Click For Restrictions – https://agency.reuters.com/en/copyright.html





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