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Stocks rise, bond yields steady as ECB seen on hold

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange August 28, 2014. European shares took a sharp tumble on Thursday as accusations by Ukraine that Russia had moved troops across the border brought a three-day global rally to a shuddering halt. REUTERS/Remote/Pawel Kopczynski (GERMANY - Tags: BUSINESS)

By Herbert Lash

NEW YORK (Reuters) - Global equity markets rose on Friday, posting their best month since February on strong U.S. data, while German bond yields edged up from record lows as expectations that the European Central Bank would ease monetary policy next week faded.

The U.S. benchmark S&P 500 index set a new closing high, ending the day above the 2,000 milestone for the third time. The S&P's gain for August was its best monthly performance since February.

Although euro-zone inflation slid to a five-year low, the decline was unlikely to lead the ECB into new stimulus anytime soon, analysts said. The data initially put a damper on European shares until fresh signs of an improving U.S. economy led a rebound.

U.S. consumer spending fell in July for the first time in six months, but a rise in consumer sentiment in August to a seven-year high suggested the retrenchment was likely temporary.

Other data showed a sharp acceleration in factory activity in the Midwest, underscoring the U.S. economy's relatively strong fundamentals.

"We reached and closed above the 2,000 milestone this week and that gets the mental obstacle out of the way," said Andre Bakhos, managing director at Janlyn Capital LLC in Bernardsville, New Jersey. "Economic numbers have been positive for the most part, people are drawing comfort from these numbers, using them as a justification for optimism."

European stocks and Wall Street closed higher, with MSCI's gauge of worldwide stock performance <.MIWD00000PUS> rising 1.9 percent in August, its best monthly performance since February.

Wall Street was better. For the month, the Dow Jones industrial average (.DJI) rose 3.2 percent, the S&P 500 (.SPX) gained 3.8 percent, and the Nasdaq Composite (.IXIC) climbed 4.8 percent.

On Friday, the Dow rose 18.88 points, or 0.11 percent, to 17,098.45. The S&P 500 added 6.63 points, or 0.33 percent, to 2,003.37, and the Nasdaq gained 22.58 points, or 0.5 percent, to 4,580.27.

The FTSEurofirst 300 (.FTEU3) index of top European shares closed up 0.33 percent at 1,373.82 points. The blue-chip Euro STOXX 50 <.STOXX50E> rose 1.8 percent for August, its biggest monthly gain since February.

European bond yields fell sharply across the euro zone at the start of the week after ECB President Mario Draghi highlighted a significant drop in inflation expectations in a speech at a meeting of central bankers in Jackson Hole, Wyoming.

Draghi's comments raised expectations that the ECB would soon deploy a large-scale purchase of assets, known as quantitative easing, or QE. That view helped weaken the euro and boosted enthusiasm for stocks on both sides of the Atlantic.

"What people realize is that for the ECB to engage in public-sector QE ... the ECB has to see the whites of the eyes of deflation," said Wouter Sturkenboom, investment strategist at Russell Investments.

German 10-year Bund yields, the benchmark for euro zone borrowing costs, rose half a basis point to 0.891 percent, having hit a record low of 0.86 percent on Thursday.

The benchmark 10-year U.S. Treasury notes seesawed, falling 2/32 in price to push its yield up 2.3431 percent.

The euro retreated, falling 0.33 percent to $1.3139, having risen as high as $1.3195 soon after the report on euro zone inflation.

Against the yen, the dollar was up 0.35 percent at 104.06.

U.S. crude oil rose for a fourth straight day as the Midwest manufacturing data pointed to strong demand.

Brent (LCOc1) for October delivery settled up 73 cents to $103.19 a barrel. U.S. crude (CLc1) gained $1.41 to settle at $95.96 a barrel.

(Additional reporting by Marc Jones in London; Editing by Jonathan Oatis, Chris Reese and Leslie Adler)