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GLOBAL MARKETS-Shares extend rally; U.S. 10-year yield hits 3 percent

Blaise Robinson
Friday, 27 Dec 2013 | 7:36 AM ET

* European shares add to year-end rally, DAX hits record high

* Yen hits 5-year lows; euro rises to 2-year high at $1.3892

* U.S. 10-year bond yield hits 3 percent

* Turkey's lira hits record low as political crisis deepens

PARIS, Dec 27 (Reuters) - European stocks climbed on Friday as renewed appetite for risk fuelled a year-end equity rally and pushed U.S. benchmark Treasuries yields above 3 percent for the first time since September.

Japan's low-yielding yen extended losses, hitting 105 to the dollar for the first time in five years as well as a five-year low against the euro.

Turkey was again in the emerging market spotlight, with the lira hitting a record low and stocks falling to their weakest level in 17 months as a corruption scandal pitting the government against the judiciary took its toll on markets.

U.S. 10-year T-note yields rose to 3.002 percent, reflecting signs of improvement in the U.S. economy which has fuelled expectations of a steady withdrawal of stimulus by the Federal Reserve next year, while in Europe, Bund futures fell by around half a point.

"In the U.S., I think yields could continue to grind higher, especially if data continues to improve," said Anders Svendsen, chief analyst at Nordea.

Most equity markets gained ground on Friday, with both the pan-European FTSEurofirst 300 index and Germany's DAX rising 0.8 percent.

Frankfurt's blue-chip index hit a record high and was on track to post an annual gain of around 25 percent, outpacing an expected rise of around 15 percent for the FTSEurofirst 300.

"The market feels unstoppable right now with growth coming back, inflation under control and central banks ultra supportive. My main worry is to what extent this is priced into the market already," said Lex van Dam, hedge fund manager at Hampstead Capital.

Japan's Nikkei stock average ended at its highest close in six years, up 55.6 percent so far in 2013, its best annual performance since 1972, driven by the country's aggressive fiscal and monetary stimulus.

The effort seems to be working, with figures out on Friday showing Japanese manufacturing activity expanding at the fastest clip in more than seven years while firms added workers at the quickest pace in over six years.

"Japanese households have a lot of cash in their assets and as inflation will speed up next year, we will see a shift from their assets in cash deposit into riskier assets. Next year we will see more active trading by individual investors," said Jun Yunoki, an equity analyst at Nomura Securities.

ASSET QUALITY REVIEW

The euro also climbed against the dollar, hitting a peak of $1.3894 according to EBS data, its highest since October 2011.

Though the euro zone's economic recovery is seen as sluggish, the currency has been underpinned by European banks' repatriation of assets as well as buying by the region's exporters as its current account surplus has increased sharply.

The European Central Bank will take a snapshot of the capital positions of the region's banks at the end of 2013, which it will use in conducting an asset-quality review next year to work out which of them will need fresh funds.

This has led to some demand for euros from banks to help shore up their balance sheets, traders said.

"There's a lot of attention on the AQR, and there's some positioning ahead of the end of the calendar year," said John Hardy, FX strategist at Danske Bank in Copenhagen.

London copper rose to its highest level in four months, with signs of economic revival in Asia and the United States burnishing the demand outlook for metals.

"You have China saying they are going to grow at 7.6 percent next year, plus a European recovery and the U.S. is doing fine, so the market sees that momentum is building in the global economy and that is the big support for metals right now," said Dominic Schnider at UBS Wealth Management in Singapore.

Gold steadied in thin holiday trade, on track for its biggest annual loss in three decades as rallies in equities and prospects of a global economic recovery dented its appeal.

Brent crude oil slipped towards $111 a barrel on Friday although supply disruptions in Africa kept losses in check.