By David Brett
LONDON (Reuters) - World shares climbed back towards five-year highs on Friday as markets cheered a robust defence of the Federal Reserve's money printing by Janet Yellen, who is expected to take charge of the U.S. central bank next year.
World equities marched higher after Yellen told a hearing to confirm her nomination as the first woman to lead the Fed that efforts to boost hiring were "imperative" for promoting a strong U.S. economic recovery.
That was read as a signal the Fed will not start to scale back its $85 billion-a-month stimulus programme, known as quantitative easing or QE, and which has fuelled huge gains in equities and other risk assets, until well into next year.
"We have taken a view that economic growth numbers are going to be relatively dull and therefore (central banks) are going to need to keep some sort of stimulus in place, so it was a surprise to us in the summer when we got market gyrations on the back of worries about QE being tapered," said Peter Clark, chief strategist at Ingenious Asset Management.
Clark said Ingenious is close to its maximum exposure in equities, with the bulk of that exposure in stocks which are defensive or offering quality growth, and has further reduced its bond allocation due to uncertainty over interest rates.
Japanese equities, made cheap for foreign investors by a falling yen, led the charge on Friday, jumping 1.9 percent to bring gains for the week so far to a heady 7.6 percent, the Nikkei index's biggest weekly rise since December 2009.
But European equities could be running out of steam.
Traders pointed to growth data on Thursday that showed the euro zone economy all but stagnated in the third quarter as France's recovery fizzled out and growth in Germany slowed.
Deflation fears and concerns among corporates about euro strength were also cited as reasons for caution in Europe.
"Europe has got its own particular challenges. The growth numbers in France were pretty poor yesterday," said Daiwa Securities economist Grant Lewis.
"There is paradox at the moment that bad news is good news (for markets worried about stimulus withdrawal) but ultimately markets want stronger growth."
Without growth expected, European equity valuations look stretched as loose monetary policy has helped inflate 12-month forward price-to-earnings on Europe's Stoxx 600 to well above their long-term average.
European shares were up just 0.2 percent.
The region's currency and bond markets were also subdued after a busy 10 days which has seen the European Central Bank deliver an earlier-than-expected rate cut and one policymaker talk openly of Fed-style asset purchases.
The euro was off at $1.345 after reaching as high as $1.3497 on Thursday while there was some profit-taking on German and other euro zone government debt after a week of steady gains.
FED FUELS FIRE
The Fed finally seems to be convincing markets that even if it does taper, an actual increase in interest rates will still be distant. Short-term debt markets rallied hard as investors pushed the predicted timing of a first hike far into the future.
Eurodollar futures have rallied so sharply in the last couple of days that they now predict the cost of borrowing dollars will stay near zero until 2016.
That in turn has helped drag down Treasury yields, with rates on two-year notes at just 29 basis points compared to a peak of 54 in early September.
"Yellen still believes the benefits of QE outweigh the costs - a little tidbit that could have been the most important thing she said market-wise," added William O'Donnell, chief U.S. government bond strategist at RBS Securities.
"She did not strike me, or our economics squad, as somebody ready to roll back on QE3 and even another 200,000-plus print in the next non-farm payroll number may not sway her."
The Fed explicitly links its monetary policy to U.S. employment.
For once the broader decline in U.S. yields hasn't troubled the dollar too much, in part because rates in Europe have fallen even more amid the talk of more aggressive ECB easing.
It has, however, made steady gains on the yen for three weeks to trade past the 100 barrier at 100.30 yen. Against a broader basket of currencies it was a fraction higher at 81.052.
In commodity markets, Brent crude dipped below $108 a barrel on Friday, heading for its biggest weekly gain since late August on expectations the Federal Reserve will stick with its easy money policy for now.
Gold drew some comfort from the prospect of continued U.S. stimulus as it faced the prospect of a third week in the red.
Brent for December delivery was last down 0.36 cents at $107.89 a barrel, while U.S. crude was flat at $93.82. Spot gold was at $1,281.70 an ounce and well away from the week's trough of $1,260.89.
(Additional reporting by Wayne Cole in Sydney, Marc Jones in London; Editing by Catherine Evans)