LONDON The euro briefly jumped to a five-week high and the bloc's bond yields and banking stocks climbed on Friday as comments from an ECB policymaker prompted investors to price in a high chance of a rate hike by year end.
Asian stocks advanced and were set for their best week since July after most of the world's biggest economies either tightened monetary policy, or signalled tightening, in a strong sign of confidence about global growth and inflation.
Markets are also keeping an eye on the Group of 20 finance leaders' meeting in Germany this weekend, where topics including reforms to boost economic growth, protectionism and exchange rates are expected to be on the agenda.
The U.S. Federal Reserve kicked things off this week with an interest rate hike on Wednesday, China followed with its own hike on Thursday, and then Britain and a European Central Bank policymaker hinted at higher rates.
The latter two came as somewhat of a surprise to markets with Britain's economic future in doubt as it exits the European Union, and the fragile single currency area still being treated with trillions of euros of central bank money-printing.
It was the suggestion from the Austrian central bank governor that the ECB could raise rates before the end of its quantitative easing scheme - scheduled to run until December - that really caught investors off guard.
"The market has been listening to the ECB's forward guidance for a long time and pricing that in," Mizuho's head of European rates strategy Peter Chatwell said.
"So now to hear a different tune from the ECB inevitably means there has to be a change in markets."
Euro zone government yields rose broadly on Friday, with some benchmark German yields at five-week highs. Money market rates, which fully price a rate hike for March 2018, showed an 80 percent chance of a December hike, up from 60 percent a week ago.
Banking stocks across the bloc also gained around 0.5 percent, outperforming the broader index which was down 0.2 percent on the day.
The ECB currently has a negative deposit rate which acts as a tax on banks hoarding money with the central bank.
HIGHER AND HIGHER
The euro jumped to a five-week high against the dollar to $1.0783, extending gains seen after an election in the Netherlands saw a comfortable win by the sitting prime minister over a far-right rival.
By 0830 GMT, the euro had edged back to $1.0769, but remained up against the U.S. dollar which hit a five-week low and is down more than 1 percent for the week.
While the Fed raised interest rates by 25 basis points on Wednesday as widely expected, it kept its original forecast of three rate hikes this year, disappointing investors who were expecting a bump up to four after a string of upbeat U.S. economic data.
Sterling rose for a third day running for the first time since mid-January and was perched at a two-week high after a decision by the Bank of England on Thursday to hold interest rates steady, while hinting it might raise them soon.
"The story in global markets over the past 24 hours has centred on a broad-based tightening of monetary policy conditions (and the perception of future tightening)," Chris Weston, chief market strategist at IG in Melbourne, wrote in a note.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.3 percent and were on track to end the week with a 3.5 percent gain, its biggest increase since July.
MSCI's all-country world stock index held near Thursday's all-time high on Friday, on track to end the week 1 percent higher.
In commodities, U.S. and Brent crude held above a 3-1/2-month low breached early this week, supported by a weaker dollar.
Gold was up slightly at $1,226.83 an ounce. It was poised to gain 1.8 percent for the week, its first in three, driven by the Fed's more moderate monetary policy stance.
(Editing by Toby Chopra)