* Shanghai shares hit 8-week high, helped by MSCI news
* Fed rate hike fully expected, another one in Dec seen likely
* Brent oil hits 4-year high before easing
* Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh
By Sujata Rao
LONDON, Sept 26 (Reuters) - A Chinese equity bounce set a modestly positive tone for world stocks on Wednesday as bets that Beijing would expand stimulus to support its economy helped offset some of the worries about global trade tensions and $80-a-barrel oil.
World stocks hung not far off six-month highs, but sentiment remains in check as U.S. benchmark bond yields stand close to seven-year peaks and investors weigh how much more policy tightening is in store from the U.S. Federal Reserve.
Shanghai-listed shares closed almost one percent higher at eight-week highs .SSEC after global index provider MSCI MSCI.N said it could quadruple China's weighting in global benchmarks. lent fresh impetus to a market already buoyed by expectations of impending state stimulus to offset the impact of U.S. tariffs. Beijing is not expected to follow U.S. Federal Reserve in raising interest rates this week.
"The Chinese over the summer increased monetary stimulus for the system and may do more, though their ability going forward is going to be limited," said Francois Savary, chief investment officer at wealth manager Prime Partners.
Savary said markets had also been heartened by the U.S. decision to impose tariffs on China at a lower 10 percent rate that the 25 percent originally threatened. Recent data point to strong U.S. economic momentum, despite concerns about the trade wars U.S. President Donald Trump is waging.
"You have economic numbers that are satisfactory... so people feel for the time being at least the impact on economic activity from the trade war may not be very substantial," he added.
Those factors helped MSCI's index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rise 0.5 percent, while a pan-European equity index .STOXX opened flat. Japan's Nikkei .N225 touched its highest since late-January, while futures signalled a firmer opening on Wall Street.
World shares stayed near flat .MIWD00000PUS following a weaker close in New York, as investors kept a close watch on bond yields in the United States and Germany. Ten-year borrowing costs in both countries have inched to multi-month highs, with the first interest rate rise by the European Central Bank now expected in September 2019, two months earlier than had been priced recently DE10YT=RR .
U.S. 10-year Treasury yields US10YT=RR rose to as high as 3.113 percent on Tuesday, near their seven-year peak of 3.128 percent hit on May 18.
Fed funds rates futures 0#FF: implied traders are fully pricing in a rate hike on Wednesday, plus an 85 percent chance of another rise in December. That expectation was cemented after data showing U.S. consumer confidence hit an 18-year high. focus will be on whether the Fed will indicate its tightening is coming to an end. The Fed may not do so today but I expect markets will soon start looking to that scenario," said Akira Takei, bond fund manager at Asset Management One.
The Fed's past policy statements have shown that policy makers see 2.9 percent, about 100 basis points above the current levels, as an appropriate level in the longer run.
That means the Fed could hit that level by the end of next year if, as expected, it hikes on Wednesday, again in December and then twice more in 2019.
Takei noted signs that higher rates are already starting to hurt the U.S. economy, for instance through rising consumer loan delinquencies. He added the dollar's softness could be an early sign of growing focus over an end to the U.S. tightening cycle.
The dollar was flat against a basket of major currencies around 94.144 .DXY , just off 2-1/2-month lows hit last week. The euro traded at $1.1765 EUR= , not far from three-month high of $1.18155 touched on Monday, while the yen JPY= changed hands at 112.8 to the dollar, approaching six-month lows set in mid-July.
Many emerging market currencies, such as the Turkish lira TRY= and the South African rand ZAR=D34 , also kept some distance from lows hit last month and an index of emerging market currencies .MIEM00000PUS was flat, having risen more than 1.5 percent in the past week.
Emerging stocks rose 0.3 percent. .MSCIEF
Oil prices were supported on concerns of tight supply on U.S. sanctions on Iran's oil exports, though they eased slightly after Trump complained the OPEC producers group was "ripping off" global oil consumers.
Brent crude futures traded just off four-year highs hit on Tuesday but remained above $82 a barrel LCOc1 . Brent is on course for a fifth consecutive quarterly increase, the longest such stretch for the global benchmark since early 2007.
"Oil is quietly driving price action in both bonds and equities, pushing up inflation breakevens and boosting energy stocks," Deutsche Bank (DE:DBKGn) analysts told clients.
Breakevens refer to the difference between nominal bond yields and the yield on inflation-linked bonds and reflect how investors are pricing future inflation.