GLOBAL MARKETS-Stocks up, dollar, bond yields down on Fed rate cut signal

* MSCI world index up 0.4% on Fed rate cut signal
* European shares gain 0.6%
* Oil jumps 3% after Iran shoots down U.S. drone
* Dollar falls to six-month lows against the yen
* Norges Bank raises rates
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

By Tom Wilson
LONDON, June 20 (Reuters) - World stock markets rose on
Thursday after the U.S. Federal Reserve signalled it was likely
to cut interest rates next month, and the dollar and benchmark
bond yields fell to multi-year lows.
The Fed on Wednesday suggested rate cuts might start as soon
as next month, saying it was ready to take action in the face of
growing economic risks The MSCI world equity index .MIWD00000PUS , which tracks
shares in 47 countries, gained 0.4% on the prospects of further
stimulus, heading for a third day of gains. The Euro STOXX 600
.STOXX rose 0.66% in early trading and Wall Street futures
indicated U.S. stocks were set to open higher.
In Asia, MSCI's broadest index of Asia-Pacific shares
outside Japan .MIAPJ0000PUS rose 1.2%, led by gains in China.
The dollar fell and benchmark U.S. and euro zone government
bonds fell after the Fed's move. The dollar was on course for
its biggest two-day drop against a basket of other currencies
.DXY in 14 months and dropped 0.5% to a half-year low against
the Japanese yen. JPY=EBS
The Fed's rate signal came before meetings at major central
banks in Asia and Europe that were expected to flag similar
moves. The European Central Bank and the Australian central bank
had earlier signalled this week more policy stimulus was needed.
"It becomes a race to the bottom for global rates markets, a
race to the bottom for FX," said Peter Chatwell, head of rates
at Mizuho.
The Bank of Japan left rates unchanged on Thursday but
stressed that global risks were rising, suggesting it was
leaning towards boosting monetary support. But Norway's central bank raised rates, as expected, sending
the Norwegian crown up 1.6% against the dollar NOK=D3 and 1%
against the euro. EURNOK=
The Bank of England was due to announce its policy decision
at 1100 GMT. It looked set to stick to its message that it was
likely to raise rates. Elsewhere, oil prices jumped 3% after Iran shot down a U.S.
drone that its Revolutionary Guards said was flying over
southern Iran, raising fears that a military confrontation could
erupt between Tehran and Washington. TALKS
Geopolitical risks elsewhere persisted, although hopes grew for
progress in U.S.-China trade talks. The world's two biggest
economies have imposed increasingly severe tariffs on each
other's imports.
Chinese and U.S. officials will hold trade talks following
instructions from their leaders, the Chinese commerce ministry
said on Thursday, adding that Beijing hoped Washington would
create the necessary conditions for dialogue.
Christophe Barraud, chief economist at Market Securities in
Paris, said stock markets had so far mostly dodged fallout from
the trade war. He warned they could suffer if economic
indicators worsen in the second half of the year.
"Equities are mainly benefiting from the easy money policy,
without too much damage on the economic front," he said. "That
may change in H2 ... metrics will likely weaken through the
world because of the impact of ongoing tariffs."

BOND YIELDS DROP
The Fed's dovish tone caused the 10-year U.S. Treasury's yield
US10YT=RR to fall as low as 1.974%, its lowest since November
2016. It reached 2.8% in January.
Government bonds elsewhere also fell, some to near record
lows. Germany's 10-year government bond yield, a benchmark for
sovereign debt in the euro zone, was down 3 basis points at
-0.316%, testing this week's record low of -0.327%. DE10YT=RR
Japanese 10-year bond yields 10YTN=JBTC fell to a
three-year low of minus 0.160%, a drop of 2 basis points. The
comparable Australian yield AU10YT=RR fell to a record low
below 1.30%.
Brent crude futures LCOc1 were up $1.39, or 2.25%, at
$63.28 a barrel around 0815 GMT on the tensions in the Middle
East and signs of improving demand in the United States.
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