European stocks hit their highest since July on Friday while the dollar and oil held firm as recent robust U.S. and European economic data drove investors towards higher-risk assets.
A potentially strong print on U.S. inflation due later, driven by a recent rise in oil prices, could fuel more selling in U.S. Treasuries and boost the dollar after the benchmark 10-year bond yield hit its highest since October on Thursday.
Wall Street was set for a slightly firmer open after the S&P 500 closed above 1,400 on Thursday for the first time since 2008, partly driven by strong regional manufacturing data.
“Investors’ risk aversion has fallen dramatically since November, mainly due to the positive impact of the two successive long-term refinancing operations of the European Central Bank,” said Olivier Huet, fund manager at Edmond de Rothschild, which manages a total of 12.4 billion euros ($16.21 billion) in assets.
“Fears that a credit crunch would have disastrous effects on the economy have evaporated.”
The MSCI world equity index was slightly higher on the day, just off a 7-1/2 month peak hit during Thursday trade, while European stocks added 0.4 percent to set their strongest level since July.
Implied volatility on the EuroSTOXX 50, a crude gauge of risk aversion, fell to 11-month lows.
Emerging stocks were down 0.3 percent on the day.
Brent oil rose 0.1 percent to $122.67 a barrel. Rising tensions between Iran and the West have been fuelling an oil rally that has forced Western leaders to prepare a release of their strategic oil reserves.
“Spare capacity is really very tight and any natural disaster or problem in the Middle East could be a real problem,” said Rob Montefusco, oil trader at Sucden Financial, highlighting supply stoppages in Syria, Sudan and elsewhere.
“No one wants to go home short at the weekend.”
German government bond futures, seen as one of the safest investment instruments, fell 74 ticks while the yield on 10-year bunds broke above 2 percent.
The yield on 10-year U.S. Treasury notes stood at 2.3138 percent, staying below the 2.35 percent hit on Thursday, which was the highest since late October.
Treasuries suffered their worst sell-off in four months this week as expectations for stronger growth in the U.S. economy and reassuring stress test results for a majority of domestic banks encouraged investors to dump low-yielding government bonds.
“We see growing risks for bonds and thus reduce our weighting in government and corporate bonds, which we add to equities. We now prefer equities to corporate bonds as the risk on trade,” Credit Suisse said in a note to clients.
Jeffrey Lacker, president of the Richmond Federal Reserve, said he disagreed with the central bank's decision this week to hold interest rates near zero until at least late 2014 because he thought rates would need to rise sometime next year.
The dollar gained 0.3 percent against a basket of major currencies, just off a two-month high set on Thursday.
The euro fell 0.2 percent to $1.3052.