World shares headed for their biggest weekly fall in almost two months on Friday as investors set aside evidence of a broad global economic recovery and worried about an early end to the Federal Reserve's stimulus.
U.S. shares could see a slight recovery later according to stock index futures, though only after the Fed worries saw Wall Street post its largest one-day percentage drop since late June on Thursday.
The growing conviction that the U.S. central bank will scale back its bond buying next month was keeping pressure on U.S. government bond prices in European trade, driving up yields on benchmark 10-year notes and supporting the dollar.
"Given that the 10-year U.S. yields are headed towards 3%, we think the general direction is for a stronger dollar," said Tom Levinson, FX strategist at ING.
The benchmark 10-year Treasury note rose to 2.78%, edging back towards a two-year high of 2.823% touched in Thursday's volatile session.
Against a basket of major developed world currencies, the dollar was steady and traded at around 97.40 yen with the euro at $1.3340.
Emerging currencies though were struggling with India's rupee hitting a record lows beyond 62 per dollar, bringing its year-to-date losses to 11%. The Indonesian rupiah also tumbled to four-year troughs.
MSCI's broad emerging equities index also fell for a second day, shedding 0.2%.
Europe' broad FTSE Eurofirst 300 index of top companies was less affected thanks to some better corporate earnings, dipping 0.1% though remaining on course for its worst week this month.
MSCI's world equity index, which tracks shares in 45 countries, was little changed overall but set for its biggest drop since late June when talk of an early cutback in the Fed's $85 bln monthly cash injections surfaced.
CAUTION URGED
The equity selloff this week has come in the face of growing evidence that the global economy is picking up steam, which would normally support demand for stocks, making some analysts cautious about reading too much into the moves.
"We've seen equity markets crumble because (U.S. Treasury) yields were going up, but they're going down on good news," said Nick Beecroft, senior markets analyst at Saxo Capital Markets.
Evidence of an improving U.S. labour market and a rise in consumer prices – both pointing to a brighter economic outlook – sparked the latest selloff, and markets will be closely watching U.S housing starts for July and the University of Michigan confidence index due later for further signs of strength.
Across the Atlantic, surprisingly strong growth in France and Germany has dragged the euro zone out of an 18-month recession and data this week on Britain's economy has shown a recovery which is gathering momentum.
Growth in China's giant economy also appears to be stabilising, and Japanese exports for July, due on Monday, are forecast to show the fastest growth in over three years.
"The global economy is improving and even if the Fed does taper in September they are unlikely to move in a significant fashion, so the caution is perhaps overdone," said Chris Beauchamp, market analyst at IG.
COMMODITY DEMAND
The brighter economic picture is being reflected in demand for industrial metals, with copper reaching a 10-week peak of $7,420 a tonne, while zinc has rallied to a five-month high of $1,990 a tonne.
Precious metals like gold and platinum have gained as well, though they could be threatened if the Fed did wind down its stimulus. Gold hit a two-month high of $1,372.51, with Platinum and palladium also at two month highs.
Oil markets were steady with Brent crude trading above $109 per barrel, after a week of strong gains as turmoil in Egypt and Libya stoked worries over the security of supplies from the Middle East and North Africa.
Concerns that violence in Egypt could affect the Suez Canal, a conduit for up to 3 mln barrels per day of oil and a vital seaway for bulk carriers, helped drive Brent to a four-month high on Thursday.
Brent crude futures for October were up 17 cents at $109.77 a barrel by late morning, positioned for a weekly rise of about 1.3%. U.S. oil for September rose 8 cents to $107.33, also up around 1.3% this week.
