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Graphic: World FX rates http://tmsnrt.rs/2egbfVh

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Graphic: Global asset performance http://tmsnrt.rs/2yaDPgn

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Currency markets edgy after suspected Japanese yen

intervention

(Updates throughout, adds fresh quote)

By Naomi Rovnick

LONDON, July 12 (Reuters) - Global stocks drifted on

Friday, masking a strong rotation on Wall Street out of big tech

stocks and into small companies expected to benefit from rate

cuts, while strong signals that Japan had propped up the yen

kept currency trading cautious.

MSCI's broad index of world shares was steady, while futures

contracts on Wall Street's S&P 500 share index and the

tech-heavy Nasdaq 100 implied both indices would flatline

in early dealings.

However, futures contracts on the U.S. small-cap Russell

2000 index were 1% higher, building on a strong

performance for this domestically-focused index on Thursday as

shares in big tech groups like Apple ( AAPL ) fell.

Traders on Friday were looking ahead to easier financing

conditions for companies in the world's biggest economy after

data on Thursday showed U.S. inflation had dropped unexpectedly

to 3% in June, fuelling bets for a September rate cut.

The Federal Reserve has held its main funds rate at a

23-year high of 5.25-5.5% for almost a year, a period where rate

cut bets have shifted rapidly on volatile economic data.

Barclays strategist Emmanuel Cau cautioned that most

long-term U.S. investment institutions still expected rates to

stay high for longer, so the small-cap stock bounce could be

short lived.

"Rotation on lower rates into under owned parts of the

market, like small caps or bond proxies, seems to be the new

pain trade," he said.

Meanwhile, shares in big U.S. banks JPMorgan Chase ( JPM ),

Wells Fargo ( WFC ) and Citigroup ( C/PN ) edged lower in

pre-market trading after their earnings updates presented a

mixed picture of current economic conditions.

WILD YEN

The dollar was steady against peers on Friday and

slipped by only 0.2% against its Japanese counterpart to 159.2

yen, following a wild ride for the currency pair in the previous

session.

The yen surged by almost 3% on Thursday in a move traders

attributed to official intervention to pull the currency up from

38-year lows, as well the drop in U.S. inflation having loaded

extra pressure onto the dollar.

While Tokyo did not confirm any move to prop up the flailing

yen, the Bank of Japan's daily operations report on Friday

suggested between 3.37-3.57 trillion yen ($21.18-22 billion) had

been spent on strengthening the currency the day before.

Japan's top currency diplomat Masato Kanda also said on

Friday: "Currency interventions should certainly be rare in a

floating rate market, but we'll need to respond appropriately to

excessive volatility or disorderly moves."

Currency strategists at Bank of America, however, said yen

interventions looked unlikely to halt the currency's decline in

the long term, noting Japan's trade deficit and its retail

investors' tendency to park money abroad for higher expected

returns.

STERLING BOUNCE

Elsewhere in markets, Europe's Stoxx share index

hit a one-month high and headed for a second consecutive week of

gains, helped by upbeat earnings from Sweden's Addtech

and Ericsson.

The 10-year U.S. Treasury yield, a benchmark for global

borrowing costs, was steady at around 4.21% on Friday after

dropping by almost 9 basis points (bps) in the previous session

as the price of the debt instrument rose on rate cut hopes.

Sterling rallied 0.4% to $1.296 and headed for its

best two-week gain in eight months after comments from Bank of

England policymakers and better-than-forecast GDP data led

traders to reduce earlier bets for an August rate cut.

The 10-year UK gilt yield rose 6 basis points (bps) to

around 4.14% as the price of the government bond fell.

Global oil prices rose to reflect optimism about U.S. rate

cuts lifting business activity, with Brent futures

gaining 0.6% to $85.93 per barrel and U.S. West Texas

Intermediate (WTI) crude 0.8% higher at $83.29 a barrel.

Gold was 0.6% lower at $2,401 an ounce.