Stocks, bonds set for weekly gain as looser policy eyed

LONDON (Reuters) - European stocks rose on Friday, on track for the year's biggest weekly gains, while German Bund yields held near record lows as recent weak data increased expectations of further central bank action to revive the economy.

The euro, which fell against the dollar on Thursday after data showed Europe's powerhouse economy Germany unexpectedly contracted in the second quarter, regained lost ground on Friday but remained near nine-month lows.

The relatively unusual phenomenon of stocks and highly rated bond prices, which move inversely to yields, rising at the same time follows a reassessment of the euro zone's growth outlook and the likelihood of the European Central Bank further easing monetary policy via a bond-buying quantitative easing program.

U.S. shares also looked set for gains, as indicated by stock index futures .

"Fixed income is behaving like it's a risk-off market. Equities, on the other hand, are being supported by the fact that bad news is good news," said Vanessa Pham, senior analyst at private wealth firm Stanhope Capital.

"You've got all the central banks saying they are ready to step in. It's more of a leap of faith in Europe...that (ECB President Mario) Draghi will come in and do outright QE as aggressively as the U.S.. As long as people believe what he is saying they will support the market."

On Friday, the pan-European FTSEurofirst 300 index <.FTEU3> rose 0.8 percent in early trade, rising for the fourth day in five, helped by the world's biggest miner, BHP Billiton , saying it could spin off assets.

The index is up 2.5 percent for the week, a performance not matched since the week ending Dec. 20.

Asian shares rose, with MSCI's main index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> up 0.2 percent. Tokyo's Nikkei index <.N225> ended flat but with a 3.7 percent gain for the week, its biggest since mid-April.

Investors also kept a wary eye on the progress of a Russian aid convoy halted on the border with Ukraine.

Comments perceived as conciliatory from President Vladimir Putin helped lift Wall Street on Thursday, along with weak jobs data suggesting the Fed would not raise interest rates soon.

However, the presence of dozens of Russian military vehicles near the border with Ukraine kept tension high.

Sub-par economic data, which also showed the entire euro zone stagnated in the three months to end-June and inflation was just 0.4 percent in July, has helped drive German 10-year bond yields to record lows below 1 percent this week and led investors to raise their bets on the ECB launching QE.

Ten-year German yields , which have also been pushed lower by investors concerned about conflict in Ukraine and the Middle East seeking a safe assets, were all but flat on Friday at 1.013 percent, having briefly dipped below 1 percent the previous day, according to traders.

Yields have fallen for six weeks in succession.

The euro was up 0.2 percent at $1.3382 but still close to last week's nine-month low of $1.3333 and on track to end lower for the week. Some analysts saw the euro pausing at these levels.

"With plenty of bad news from the euro zone behind us and investors adjusting their expectations lower, it may be more difficult for euro/dollar to fall from here, based on bad news from the euro zone only," said Petr Krpata, analyst at ING.

JACKSON HOLE

He said investors would look to the annual Jackson Hole gathering of central bankers at the end of next week for more clues to future U.S. monetary policy.

The dollar was up at 102.56 yen and sterling, which fell earlier this week after the Bank of England made it clear it was in no hurry to raise interest rates, edged up to $1.6693, having hit a four-month low of $1.6657 on Thursday.

U.S. Treasury yields remained close to recent lows. The 10-year note yielded 2.394 percent, unchanged from the New York close.

Worries about economic weakness and potential demand for oil weighed on Brent crude. The price added 40 cents to $102.50 a barrel due to weakness in the dollar but held close to 13-month lows.

Gold rose 0.1 percent towards $1,314 an ounce and was set for a second consecutive week of gains.

(Additional reporting by Marius Zaharia and Anirban Nag in London, Blaise Robsinson in Paris and Lisa Twaronite in Tokyo, editing by John Stonestreet)

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