Global stocks rally, Europe at record highs, dollar gains

By Herbert Lash and Amanda Cooper

NEW YORK/LONDON (Reuters) -A rally in global equity markets lifted stocks in Europe to record highs on Friday amid strong corporate earnings and hopes central bank interest rate cuts are near, while the dollar edged higher despite signs of slowing U.S. economic growth.

European shares posted their biggest weekly gain since late January, with the pan-regional STOXX 600 index rising for a sixth straight session, while the FTSE 100 in London hit yet another record high.

The Dow industrials index registered its eighth daily advance as the three major Wall Street indexes posted weekly gains but the Nasdaq closed marginally lower on the day.

Strong performance on both sides of the Atlantic, along with gains overnight in Tokyo and elsewhere in Asia, pushed MSCI's all-country world index within 0.2% of a record closing high.

U.S. equity markets took comfort from earning season as corporate results in aggregate beat expectations, said Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management in Boston.

"It certainly gave some assurance that growth is holding up while companies protect profit margins," Mullarkey said, referring to corporate America.

While in Europe, "the prospect of rate cuts is helping drive equity markets across the euro zone as it still looks like a decent value play to global asset allocators," he said.

The pan-European STOXX 600 index closed up 0.77%, the FTSE ended 0.63% higher and MSCI's gauge of stocks across the globe rose 0.31% - just 0.2% from a new closing high.

The Dow Jones Industrial Average rose 0.32%, the S&P 500 gained 0.17% and the Nasdaq Composite eased 0.03%.

The dollar pared initial declines and turned modestly higher as investors assessed a reading on U.S. consumer sentiment and sifted through a flurry of comments from Fed officials.

The University of Michigan's preliminary reading of consumer sentiment came in at 67.4 for May, a six-month low and below the 76.0 estimate of economists polled by Reuters. In addition, the one-year inflation expectation climbed to 3.5% from 3.2%.

"The U.S. exceptionalism trade is fading. We did see a decline yesterday based on the higher-than-expected rise in jobless claims," said Karl Schamotta, chief market strategist at Corpay in Toronto.

"The underlying trend here does look as if the dollar's essentially peaking here and then it might decline."

The dollar index, which measures the U.S. currency against a basket of six peers, gained 0.07% to 105.29. The euro slid 0.1% to $1.077, while the yen weakened 0.17% to 155.74 per dollar. The pound posted a modest weekly loss after the Bank of England on Thursday paved the way for the start of rate cuts as soon as next month and data showed the British economy exited a mild recession in the first quarter of this year.

INFLATION AHEAD

Markets await both next week's producer price index and the consumer price index for signs that U.S. inflation has resumed its downward trend toward the Fed's 2% target rate.

Hotter-than-expected inflation reports last month had quashed any lingering expectations of near-term U.S. rate cuts. But markets are now fully pricing in a cut only in November, while chances of the Fed moving in September have narrowed.

In contrast, markets now imply a 50-50 chance of a BoE cut in June and are almost fully priced for August. They also imply an 88% chance the European Central Bank will ease in June.

BOE Governor Andrew Bailey said there could be more reductions than investors expect, the latest sign of the growing divergence between the Europe and U.S. rate outlooks.

Traders currently anticipate roughly 42 basis points of cuts this year from the Fed. In comparison, traders are pricing in 55 bps of easing from the BoE this year, while anticipating 68 bps of cuts from the ECB.

Treasury yields rose as traders waited on next week's key April inflation data to guide expectations of Fed monetary policy.

The yield on benchmark 10-year Treasury notes rose 5.1 basis points to 4.5%, while the two-year yield, which typically moves in step with interest rate expectations, rose 6.3 basis points to 4.8698%.

Oil prices fell by about $1 a barrel as comments from Fed officials indicated higher-for-longer interest rates, which could hinder demand from the world's largest crude consumers. U.S. crude futures fell $1.00 to settle at $78.26 a barrel and Brent settled down $1.09 at $82.79 a barrel.

Gold prices rose, en route to their best week in five, with zero-yield bullion building on momentum fueled by weaker U.S. jobs data this week that reinforced expectations for the Fed to cut rates this year.

U.S. gold futures for June delivery settled 1.5% higher at $2,375.00 per ounce.

Bitcoin fell 3.19% to $60,613.00.

(Reporting by Herbert Lash, additional reporting by Amanda Cooper and Ankur Banerjee; Editing by Ros Russell, Kirsten Donovan, Nick Zieminski and Jonathan Oatis)