Growth, debt nerves keep world stocks below recent highs

World stocks remained below this week's 8-month peak on Friday while demand for German government debt rose as concerns about Chinese and euro zone growth and a renewed focus on sovereign debt problems in Italy and Spain kept investors cautious.

Against a backdrop of slowing economies, Italy's planned bond sales next week are already being touted as a possible flashpoint for the peripheral euro zone debt crisis. Growth is an essential component of plans by struggling euro zone countries to reduce high debt levels.

The MSCI world equity index was largely steady on the day, having hit its highest level in nearly 8 months earlier this week. The rally has stalled on the back of weak factory activity data in China and the euro zone, which has somewhat undermined faith in the pace of a global upturn.

"Global markets are taking a breather, anticipating large rebalancing outflows out of equities into fixed income, because the relative performance of equities has been very significant this quarter," Lex van Dam, hedge fund manager at Hampstead Capital, which manages USD 500 million of assets, said.

European stocks were slightly lower on the day, while emerging stocks fell 0.2%, led by falls in Shanghai and Tokyo. Brent oil was up 0.5% at USD 123.74 a barrel, underpinned by worries that military conflict with Iran will hit supplies and create an oil price spike.

German government bund futures were up 20 ticks. These safe-haven assets for investors have rallied more than 150 ticks this week as the mood has soured, with optimism about the U.S. economy giving way to worries over a weak growth outlook in the euro zone.

While Spain has borne the brunt of deteriorating investor appetite for peripheral debt after it ripped up agreed deficit targets, Italy may come under closer scrutiny as Prime Minister Mario Monti faces stiff resistance to attempts to drive through labour reforms.

"If he doesn't gain traction and opposition support, he won't be able to get the reforms through and that would be the catalyst for underperformance of Italy versus Spain," said Achilleas Georgolopoulos, strategist at Lloyds Bank.

Spain's slippage on its budget goals has seen its 10-year bond yield rise as much as 44 basis points above those on equivalent Italian debt.

Italian yields were up 3 basis points at 5.13%, with Spain also up 3 bps at 5.54%.

The dollar fell 0.4% against a basket of major currencies. The yen fell 0.5% to 109.50 per euro.