* European markets open lower
* Gilts, sterling in firing line
* Yellen suggests allowing inflation to overshoot target
* U.S. stocks futures down 0.3 pct
By Marc Jones
LONDON, Oct 17 World stocks started the week in
the red Monday as the dollar touched a 7-month high and U.S. and
European government bond yields - the main driver of global
borrowing costs - climbed to their highest since June.
Riskier assets have had a difficult few weeks, undermined by
concerns about a potential rise in U.S. interest rates, the
outcome of U.S. elections, Britain's departure from the EU and
the health of German and Italian banks.
China and Hong Kong had pulled Asian stocks lower overnight
and Europe fell early on as weak-looking updates from media
group Pearson and Norwegian seafood company Marine
Harvest added to nervy signals from bond markets.
U.S. Treasuries pushed past 1.8 percent, German
Bund yields hit their highest in 4-months ahead of
a European Central Bank meeting on Thursday, while Brexit
worries ensured another jittery start for UK gilts.
Despite the specifics, all the moves came amid signs that
inflation is finally starting to wake from its slumber and that
top central banks may let inflation "run hot" as U.S. Federal
Reserve chief Janet Yellen suggested on Friday.
"We have the two month window where there will be a lot of
uncertainty about what the European Central Bank will do, and we
had a poor gilt opening this morning and that has spooked the
market," said Mizuho interest rate strategist Antoine Bouvet.
"We expected another 20 basis point rise in Bund yields by
Elsewhere in markets, the dollar took a breather
after hitting a seven-month high against a basket of six major
currencies and following its largest weekly rise in more than
seven months last week.
That gave some respite to the euro and yen, which had
both touched 2-1/2-month lows of $1.0964 and 104.22 yen per
dollar respectively, although not for the Brexit-battered pound
which slumped back to $1.2160.
Media reports of disagreements between the finance minister
and his cabinet colleagues over the terms of Britain's exit from
the European Union were the latest cause of strife.
The Daily Telegraph said Phillip Hammond could quit his post
after he was excluded from government meetings because he
criticised the "hard" Brexit stance of Prime Minister Theresa
Although the Treasury denied that Hammond will quit, it did
little to instill confidence in the pound, traders said.
Investors are awaiting a raft of global economic data this
week, including U.S. industrial production on Monday; U.S. and
UK consumer prices, and UK producer prices on Tuesday; and
Chinese third-quarter gross domestic product on Wednesday.
The European Central Bank will publish bank lending figures
on Tuesday, hold its policy meeting on Thursday and euro zone
consumer confidence data for October is due on Friday.
Emerging Asian currencies lost ground on Monday after the
comments by Yellen, which spurred investors to cut bond holdings
in the region.
The Chinese yuan also weighed as it dropped to
its weakest since September 2010 as the central bank in Beijing
set its official guidance rate lower again.
China's economy likely grew 6.7 percent in the third quarter
from a year earlier, the same pace as the previous quarter, as
increased government spending and a property boom offset
stubbornly weak exports, according to a Reuters poll of 58
But analysts are increasingly worried that China's growth is
becoming too reliant on government spending, ballooning debt
levels and a housing market that is showing signs of
U.S. stock futures fell 0.3 percent. MSCI's broadest
index of Asia-Pacific shares outside Japan had
ended down 0.5 percent, with Hong Kong's Hang Seng
hitting 1-1/2-month lows, though the weaker yen helped Japan's
Nikkei close up 0.3 percent.
"Markets are reacting to the possibility that the Fed might
join the Bank of Japan in conducting policy to steepen the yield
curve," Ric Spooner, chief market analyst at CMC Markets in
Sydney, wrote in a note.
"In the Fed's case, this might amount to running the
gauntlet of higher inflation with a very slow pace of monetary
Oil prices, which have risen for four straight weeks, have
helped drive the pickup in inflation globally.
Brent crude futures stood flat at $51.94 in European
trade with U.S. crude futures a shade lower at $50.15 per
They were capped by a rising rig count in the United States,
a strong dollar and record OPEC-output.
Some market players are wary of a possible hit to investors'
risk appetite after Iraq's Prime Minister Haider al-Abadi
announced the start of an offensive to retake the Iraqi city of
Mosul from Islamic State.
(Reporting by Marc Jones; Editing by Alison Williams)