Bond rout keeps stocks under water, China woes give dollar a lift

LONDON (Reuters) - Global shares were stuck around two-month lows on Friday, capping a week when bond investors became more convinced that interest rates will remain high for longer than initially thought, sending U.S. yields to near 16-year peaks.

Wall Street was headed for a weaker start, with little in the way of economic data for markets to digest, though Thursday's sell off in U.S. government bonds paused on Friday before the opening bell for U.S. stocks.

S&P 500 futures and Nasdaq futures were down by 0.5% to 0.8%

"The US calendar is empty today and the focus will likely be on bond market dynamics after back-end yields touched fresh multi-year highs yesterday," ING bank analysts said.

The greenback was set for a fifth consecutive week of gains, its longest winning streak for 15 months, helped by the prospect of U.S. interest rates remaining high or rising even further, and a safe haven in the face of growing risks in China.

Crude oil was set to snap a seven-week winning streak as China's slowing economic growth clouded the picture for demand. The sour mood in markets extended to cryptoassets, with bitcoin hitting a fresh two month low.

Jason Da Silva, director, global investment strategy at Arbuthnot Latham, said stock markets were paying the price for bond yields soaring as economic data from the United States smash expectations, despite all the rate hikes so far.

The MSCI All Country stock index (.MIWD00000PUS) was down 0.3%, hitting its lowest since early June after falling 5.85% during August, though it remains 10% up for the year.

There was little market response to news of a package of measures from China's securities regulator to revive a sinking stock market.

Ten-year U.S. Treasury yields eased 8 basis points to 4.2251%, after surging about 30 basis points this month alone to a 10-month top of 4.3280% and near the highest levels since 2007.

Euro zone government bond yields also eased on Friday as concerns about the global economy nudged investors into safe-haven government bonds and further signs emerged that euro zone inflation has peaked.

Britain's 10-year bond yield had risen on Thursday to its highest since 2008 at around 4.76% , but eased slightly on Friday as sterling softened.

"The bond yields are saying you are probably going to have to keep rates higher for longer, and if growth starts to really pick up again, we might need to tighten further and stock markets are not liking that," Da Silva said.

Minutes from the Federal Reserve this week showed most members of the rate-setting committee continued to see significant upside risks to inflation, suggesting more hikes are in the pipeline.

Attention now turns to the Fed and other top central banks' annual gathering in Jackson Hole, Wyoming, next week, with investors set to scrutinise a speech from Fed Chair Jerome Powell on Aug. 25 for latest clues on potential rate hikes.

Markets are already scaling back rate cuts bets next year.