Stocks, bonds set for weekly gain on loose policy

By Nigel Stephenson

LONDON (Reuters) - European stocks rose on Friday and were on track for their biggest weekly gains since mid-February, while German Bund yields held near record lows as recent weak data increased expectations for central bank action to lift the economy.

The euro, which took a hit on Thursday after data showed Europe's powerhouse economy Germany unexpectedly contracted in the second quarter, edged up against the dollar on Friday but remained near nine-month lows.

"Given the recent data flow I guess some market players consider there is a high probability of QE in Europe," said Gilles Moec, an economist at Deutsche Bank in London.

Investors also kept a wary eye on the progress of a Russian aid convoy halted on the border with Ukraine.

Comments perceived as conciliatory from President Vladimir Putin helped lift Wall Street on Thursday, along with weak jobs data suggesting the Fed would not raise interest rates soon.

On Friday, the pan-European FTSEurofirst 300 index (FTEU3) rose 0.4 percent in early trade, set for gains for the fourth time in five days, helped by the world's biggest miner, BHP Billiton (L:BLT) saying it could spin off assets.

The index is up 2.2 percent for the week, a performance not matched since the week ending Feb. 14.

Sub-par economic data, which also showed the entire euro zone stagnated in the three months to end-June and inflation was just 0.4 percent in July, has helped drive German 10-year bond yields to record lows below 1 percent this week and led investors to raise their bets on the European Central Bank launching a large-scale bond-buying program at some point.

Ten-year German yields , which have also been pushed lower by investors concerned about conflict in Ukraine and the Middle East seeking a safe assets, were all but flat on Friday at 1.013 percent, having briefly dipped below 1 percent the previous day, according to traders.

Yields have fallen for six weeks in succession.

The euro was up 0.1 percent at $1.3373 but still close to last week's nine-month low of $1.3333 and on track to end lower for the week. However, some analysts saw the euro pausing at these levels.

"With plenty of bad news from the euro zone behind us and investors adjusting their expectations lower, it may be more difficult for euro/dollar to fall from here, based on bad news from the euro zone only," said Petr Krpata, analyst at ING.

The dollar was up at 102.54 yen and sterling, which fell earlier this week after the Bank of England made it clear it was in no hurry to raise interest rates, held steady at $1.6684, having hit a four-month low of $1.6657 on Thursday.

Earlier, Asian equities made modest gains. MSCI's main index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) added 0.3 percent. Tokyo's Nikkei index (N225) ended flat but with a 3.7 percent gain for the week, its biggest since mid-April.

U.S. stocks rose on Thursday, with the S&P 500 index (SPX) ending 0.43 percent higher.

Traders said Putin's remarks that Russia would stand up for itself but not at the cost of confrontation with the outside world, had eased pressure on the market.

U.S. Treasury yields remained close to recent lows. The 10-year note (US10YT=RR) yielded 2.394 percent, unchanged from the New York close.

Worries about economic weakness and potential demand for oil weighed on Brent crude. The price edged up $102.31 a barrel due to weakness in the dollar but held close to 13-month lows.

Gold rose about 0.1 percent to $1,313 an ounce and set for a second consecutive week of gains on safe-haven demand.

(Additional reporting by Marius Zaharia and Anirban Nag in London, Blaise Robsinson in Paris and Lisa Twaronite in Tokyo)