LONDON, Oct 17 - European stocks inched higher on Friday after a lacklustre performance by Wall Street but more bullish economic sentiment pushed benchmark government bond yields to 10-month highs. Investors' confidence that a U.S.-led economic recovery is on track has been bolstered this week by data showing manufacturing picking up, inflation tame, industrial production expanding and third quarter earnings beating expectations. "We continue to believe equity markets will make further progress by the end of the year, driven primarily by the potent combination of upbeat macroeconomic data and strong third-quarter results," said Rolf Elgeti, a strategist at Commerzbank. Markets are looking to see whether the more positive tone is reinforced in the University of Michigan's preliminary consumer sentiment report due at 1345 GMT. The latest U.S. data has helped the dollar, which held near 1-1/2 week highs against the euro, but currency markets were nervous ahead of President George W. Bush's meeting with Japanese Prime Minister Junichiro Koizumi later on Friday.
European stocks pushed higher in early trade despite a mixed performance on Wall Street where the Dow Jones industrial index <.DJI> slipped overnight after tepid forecasts from IBM and construction equipment firm Caterpillar Inc. . The FTSE Eurotop 300 <.FTEU3> index of leading shares was up 0.3 percent with the DJ Euro STOXX 50 index <.STOXX50E> up 0.38 percent. Earlier Asian stock markets were broadly higher, taking their cue from the U.S. data. Japan's TOPIX <.TOPX> index ended trading up 0.34 percent at 1,094.59 -- a 16-month high -- with the Nikkei average <.N225> up 0.12 percent.
BONDS, DOLLAR
While stock gains were weak, bond yields pushed up to 10-month highs on growing certainty about the U.S. recovery. "Optimism is growing that the U.S. economy is in good shape and the sentiment for bonds is bearish. The main concern is that the Federal Reserve might raise rates," said Charles Berry, a fixed income trader at Landesbank Baden Wuerttemberg. The benchmark 10-year Bund yield was up 1.4 basis points to yield 4.364 percent. Yields have risen throughout the week with 10-year yields up almost 20 basis points. At the short-end the the two-year, interest rate sensitive Schatz was up 0.6 basis points at 2.719 percent. The dollar maintained its firm tone of the last few days, but currency markets were awaiting President Bush's visit to Asia where he is due to meet Japanese Prime Minister Junichiro Koizumi later on Friday. Some analysts are betting that Bush, who sent the dollar tumbling earlier this week after he said currency values should be set by markets, will tone down his comments in face-to-face meetings. "If there is a shock it would be that he is very strident in his views on the dollar, but we had the comments earlier in the week that he is going to tell the Japanese he doesn't agree with intervention," said Lee Ferridge, head of global currency strategy at Rabobank. The dollar was flat on the day at $1.1594 against the euro, with 1-1/2 week highs set at $1.1563 on Thursday. Against the yen, it was a touch lower at 109.71 , but keeping its distance from last week's three-year lows at 108.23. Despite heavy Japanese intervention, the dollar has dropped around 10 percent in the past three months, from above 120 yen. Crude oil futures were down 14 cents at $29.86 with selling driven by higher U.S. stock levels while safe-haven gold rose slightly to stand at $371.8 to $372.55 an ounce, up from $371.35 to $372.05 at its close in New York.//