By Marc Jones
LONDON (Reuters) - World equity markets held close to all-time highs on Tuesday, as investors latched on to rising bets on higher borrowing costs in the U.S. and Britain.
Reports that U.S. President Trump might pick Stanford University economist John Taylor to lead the Fed after Janet Yellen's term ends next year sent two-year Treasury yields to their highest since 2008 and pushed up the dollar.
That meant European bonds started in the red too while the euro was down for a fourth straight day for the first time since May.
Taylor is an advocate of a rules-based approach to interest rate policy that would likely see official Fed rates much higher than at present - at least 3.5 percent according to some economists.
The pop in short-yields was not matched at the long end and the 2-to-10 year U.S. yield curve hit its shallowest in more than a year.
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"Fed chairs have often influenced U.S. monetary policy quite considerably in the past. And I would certainly see Taylor as a candidate who would fit in this pattern," Commerzbank analyst
Thu Lan Nguyen said.
"That makes one thing clear: should Trump nominate Taylor as Yellen's successor the U.S. dollar would initially appreciate notably."
Despite's the dollar's gains, Wall Street stocks set new records again on Monday along with all-time highs on the MSCI's 47-country 'All-World' index.
The MSCI index held close to those levels on Tuesday, shedding around 0.1 percent.
European shares were close to flat too, underpinned by solid earnings from food group Danone and education specialist Pearson and talk of a break-up of investment bank Credit Suisse.
The ViX volatility gauge, which measures market nervousness, stayed near its recent record lows below 10 percent and while Asia stocks had been more mixed, Japan's Nikkei eked out its 11th straight daily gain as eyes there turned to the weekend's Japanese elections.
One of Monday's big movers, oil, consolidated a near month-high having spiked after Iraqi forces seized the oil-rich city of Kirkuk from fighters loyal to the country's semi-autonomous Kurdish Regional Government.
After months of rangebound trading during which OPEC-led supply cuts supported crude values but rising U.S. output capped markets, prices have moved up significantly this month.
Brent crude oil was 5 cents higher at $57.87 a barrel by 0800 GMT, up almost a third from its mid-year levels. U.S. West Texas Intermediate (WTI) crude was nudging up again too at $51.99.
There were unconfirmed reports that Kurdish forces had shut around 350,000 barrels per day (bpd) of oil production from major fields.
"The 500,000 bpd Kirkuk oilfield cluster is at risk," Goldman Sachs said in a note to clients.
Tension between the United States and Iran is also rising, after U.S. President Donald Trump on Friday refused to certify Iran's compliance over a nuclear deal which removed long-running sanctions.
"If there (were new sanctions), we expect that several hundred thousand barrels of Iranian exports would be immediately at risk," Goldman said. During the previous round of sanctions around 1 million bpd of oil was cut from global markets.
Bellwether industrial metal copper hit a three-year high as it soared to $7,134.5 a tonne after its biggest gain in about 10 months.
SWIRLING STERLING
Britain's pound drifted higher against the dollar and the euro as UK inflation data bolstered the chances of the Bank of England's first interest rate hike in over a decade next month.
The figures showed year-on-year price growth hit 3.0 percent in September, up from 2.9 in August which was already a more than five-year high.
It left sterling at $1.3275 and at 88.6 pence per euro. BoE Governor Mark Carney may offer further clues about a possible rate rise later too when he appears before a parliamentary committee.
Brexit-related rumblings weren't far below the surface either.
British Prime Minister Theresa May and European Commission chief Jean-Claude Juncker agreed over dinner in Brussels on Monday that the pace of negotiations over Britain's departure from the European Union should be stepped up.
Some market watchers such as JP Morgan are sceptical on sterling's outlook, recommending investors to buy euros against the British pound as "the overhang of the Brexit issue itself would constrain how much accommodation the BoE would be able to remove."
Mexico's peso flirted with a five-month low on concerns over the future of the North American Free Trade Agreement (NAFTA) after Washington presented a number of hard-line proposals in re-negotiation talks.
(Additional reporting by Hideyuki Sano in Tokyo; editing by John Stonestreet)