By Rodrigo Campos
NEW YORK (Reuters) - Wall Street put a floor under global equities on Friday after a weak inflation reading brought investors back into U.S. stocks even as tensions between the United States and North Korea continued to escalate, though the geopolitical fears still drove safe-haven buying of gold and the yen.
A slight rise in a measure of U.S. consumer prices pointed to benign inflation that could make the Federal Reserve cautious about raising interest rates again this year, which would be favourable to equity investors.
The hope that the Fed will have to slow its rate-hike path appeared to stop, at least for now, the near $1-trillion loss in world stocks valuations this week triggered by the war of words between Pyongyang and Washington.
"The data confirms the Fed will have a wait-and-see attitude," said King Lip, chief investment officer at Baker Avenue Asset Management in San Francisco. Reuters data show a 28 percent chance for a hike after the Fed's December meeting.
Japanese markets were closed for a holiday, but the tense mood dragged Asian shares lower and an MSCI index of stocks across the globe <.MIWD00000PUS> was on track to post its largest weekly drop since the week before Donald Trump won the U.S. presidential election in November.
Trump issued a new warning to Pyongyang on Friday, saying in a tweet: "Military solutions are now fully in place, locked and loaded, should North Korea act unwisely."
North Korea had responded to Trump's previous promise to unleash "fire and fury" with a threat to land a missile near the U.S. Pacific territory of Guam.
It is "a bullish sign that the equity markets are rebounding somewhat on a Friday, in spite of the fact that investors will need to wait for two days to react to any geopolitical news that comes out over the weekend," said Robert Phipps, a director at Per Stirling Capital Management in Austin, Texas.
"If earnings can stay strong and interest rates remain low investors can look beyond North Korea and continue to rally equities," Phipps said.
The Dow Jones Industrial Average <.DJI> rose 38.9 points, or 0.18 percent, to 21,882.91, the S&P 500 <.SPX> gained 5.46 points, or 0.22 percent, to 2,443.67 and the Nasdaq Composite <.IXIC> added 41.86 points, or 0.67 percent, to 6,258.73.
The pan-European FTSEurofirst 300 index <.FTEU3> lost 1.01 percent and MSCI's gauge of stocks across the globe <.MIWD00000PUS> shed 0.12 percent.
Emerging market stocks lost 1.20 percent. MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> closed 1.37 percent lower.
South Korea's KOSPI <.KS11> fell 1.7 percent on Friday to its lowest level since May 24, but its losses for the week are a relatively modest 3.2 percent.
"Pretty remarkable, perhaps even extraordinary, considering," said Tim Ash, strategist at fund manager BlueBay.
A Reuters Datastream index of more than 7,000 stocks across the globe saw its market capitalisation drop from a record high $61.36 trillion on Monday to $60.43 trillion at the close on Thursday.
Many world stock markets have hit record or multi-year highs in recent weeks, leaving them vulnerable to a selloff, and the tensions over North Korea have proved to be the trigger.
The yen on Friday added to a strong weekly rally against the dollar of close to 1.5 percent, hitting its highest level versus the greenback in almost four months, at 108.73 yen >.
The yen tends to benefit during times of geopolitical or financial stress as Japan is the world's biggest creditor nation and there is an assumption that Japanese investors will repatriate funds should a crisis materialise.
The Korean won > continued to fall versus the dollar, down 0.13 percent to 1,143.5 on Friday for a 1.6 percent decline on the week.
The dollar was further weighed on Friday by the soft U.S. inflation data.
"If the data continues to come in on the softer side, the market might start to price the Fed staying on hold this year," said Sireen Harajli, FX strategist at Mizuho in New York.
The dollar index <.DXY> fell 0.39 percent, with the euro > up 0.48 percent to $1.1827.
Sterling > was last trading at $1.3013, up 0.30 percent on the day.
The Japanese yen last strengthened 0.16 percent versus the greenback at 109.05 per dollar
In bond markets, the yield on U.S. Treasuries fell, also pressured by the lowered expectations for a Fed move.
"There are four more (inflation) prints between now and the December FOMC meeting and we expect the Fed to remain data-dependent, if a touch more cautious," TD Securities said in a research note.
Benchmark 10-year notes > last rose 7/32 in price to yield 2.1888 percent, from 2.211 percent late on Thursday.
The 30-year bond > last rose 6/32 in price to yield 2.7847 percent, from 2.794 percent late on Thursday.
After touching a more than two-month high, spot gold > last added 0.3 percent to $1,290.00 an ounce. U.S. gold futures
Ongoing global glut concerns lingered in oil markets despite a bigger-than-expected draw in U.S. crude inventories, leaving prices volatile.
U.S. crude
(Additional reporting by Gertrude Chavez-Dreyfuss and Saqib Iqbal Ahmed in New York, Sruthi Shankar and Tanya Agrawal in Bangalore and Dmitry Zhdannikov in London; Editing by Leslie Adler)
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