World stocks head for weekly fall, yields at multi-decade highs as oil fuels inflation fears

By Stella Qiu and Shashwat Chauhan

July 24 (Reuters) - World stocks were headed for a weekly loss and long-dated bond yields hovered around multi-decade highs on Friday, as a near-40% rise in oil prices this month due to the intensifying conflict in the Middle East ignited inflation fears and expectations for rate hikes around the globe.

MSCI's all-world index inched 0.3% lower, headed for a second straight weekly fall. The pan-European STOXX 600 rose 0.4% after a more than 1% drop in the last session.

Nasdaq futures dipped 0.1% despite a more than 4% jump in chipmaker Intel following bumper results. Tech stocks have been under pressure this week as investors grow increasingly uneasy about multi-billion-dollar spending on AI that has yet to yield conclusive evidence of paying off. 

Brent crude slipped 2% to $98.7 a barrel, after surging 7% overnight to a two-month high of $102. Attacks by Iran-aligned Houthis on Saudi tankers in the Red Sea risk choking off a second crucial Middle East artery for global oil supplies, alongside Iran's near-closure of the Strait of Hormuz. 

President Donald Trump threatened "major military punishment" for Iran and its Houthi allies, with the U.S. military striking Iran late Thursday and early Friday in the 13th consecutive night of attacks.

"The dollar has been going up for a few days so clearly the risk has been building and the fact that oil has been at these higher levels for several days has really started to work through the cross-asset correlation," said Shaniel Ramjee, co-head of multi-asset investment at Pictet Asset Management. 

Most major currencies were steady against the dollar on Friday, though the dollar index was on pace for its biggest weekly jump in about a month. 

News that the U.S. administration will impose higher tariffs on goods from 60 trading partners also did not help the inflation picture, with 30-year Treasury yields marching towards their highest since 2007 and German 10-year Bund yields -- the benchmark for the euro zone -- holding close to their highest since 2011. 

Markets show traders believe central banks are more likely to raise borrowing costs, with a one-in-three chance of a rate hike from the Federal Reserve as soon as next week — a sea change from merely a week ago — while a move in September is more than fully priced in.

The European Central Bank left rates unchanged on Thursday, but a September rate hike is about 70% priced in. Data on Friday offered a more optimistic economic outlook, after surveys of business activity showed Germany's private sector returned to growth in July for the first time in four months and contraction in France's private sector eased this month. 

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan dived 2.5%, with Japan’s Nikkei down 2.7% and South Korea's KOSPI tumbling 5.7% to mark a fifth straight week of declines. Hong Kong's Hang Seng index fell 1.7%.

Global tech stocks took a hit after Alphabet and Tesla, the first two of the so-called "Magnificent Seven" megacap tech companies to report this season, spooked investors as both burned through cash in their most recent quarter for their big spending on AI infrastructure. 

"These companies are engaging in more capex and it effectively makes the mega-cap segment of the U.S. stock market more interest rate sensitive at a time where we see bond yields moving up, especially real yields," Pictet's Ramjee said. 

DOLLAR BUOYED BY RISING YIELDS 

In bond markets, the benchmark 10-year U.S. yield hit an over 18-month high of 4.7135%, having climbed nearly 16 basis points this week. The yield on 30-year bonds was steady at 5.176%, not far from a 19-year peak of 5.201%. 

Higher Treasury yields helped the U.S. dollar, with the dollar index holding at 101.4 after having hit its highest so far this month on Thursday.

The yen was pinned near 40-year lows at 163.79 per dollar, drawing a warning from the U.S. Treasury that excess volatility in the currency was undesirable.

Japan's finance minister has repeatedly issued verbal warnings about a possible intervention in the currency market, after carrying out yen-buying operations in April and May. This has been to little avail, given the yen has weakened well beyond the 160 level that market participants previously viewed as a possible catalyst for official buying.

Precious metals were steady in choppy trading, with gold flat at $4,046 an ounce after falling 2% the day before, while silver ticked 0.7% higher after a decline of 3.4% on Thursday. 

(Reporting by Stella Qiu in Sydney and Shashwat Chauhan in Bengaluru; Editing by Sonali Paul, Lincoln Feast, Amanda Cooper and Mrigank Dhaniwala)