World shares hit three-week high, U.S. futures resilient as recession fears wane

By Carolyn Cohn

LONDON (Reuters) - World shares hit a three-week high on Wednesday and U.S. index futures were indicating a steady open on Wall Street as strong U.S. corporate earnings and the expected resumption of Russian gas supply to Europe tempered recession fears.

The dollar was trading near two-week lows on lower U.S. rate hike expectations.

Russian gas flows via the Nord Stream 1 pipeline are seen restarting on time on Thursday after the completion of scheduled maintenance but at lower than its full capacity, two sources told Reuters, reducing investors' concerns about gas supply to Europe in tat-for-tat measures in response to the Ukraine conflict.

Markets still expect a large 75-basis-point interest rate rise from the U.S. Federal Reserve next week to rein in white-hot inflation. But this represents a rowback from previous expectations of 100 bps.

In contrast, Reuters reported European Central Bank policymakers are mulling raising rates by a bigger-than-expected 50 basis points on Thursday.

"At the margins there is some good news like Nord Stream," said Luca Paolini, chief strategist at Pictet Asset Management.

"Overall, there is no reason why the market should rally that much, but it springs from inflation expectations."

S&P 500 futures and Nasdaq futures were flat, after a strong showing overnight on better-than-expected results from U.S companies including Netflix Inc (NASDAQ:NFLX).

MSCI's world stock index <.MI WD00000PUS> gained 0.12% after rising 2% on Tuesday.

Britain's FTSE 100 rose 0.2%, buoyed by oil and mining stocks and shrugging off data showing UK inflation at a new 40-year high.

European stocks hit near-six-week highs before reversing to trade 0.23% lower.

The euro dropped 0.34% to $1.0188, after racking up its biggest one-day percentage gain in a month in the previous session on rising rate hike bets.

The dollar gained 0.3% to 107 against an index of currencies, but remained close to two-week lows hit in the previous session.

"The FX market has an even shorter-term focus than usual," said Societe Generale (OTC:SCGLY) strategist Kit Juckes.

"The Nordstream 1 pipeline reopening, Italian political stability and whether the ECB hikes by 25 bps or 50 bps tomorrow matter more than what might happen in 2023. With such a short-term focus, of course volatility stays high."

Italian Prime Minister Mario Draghi on Wednesday demanded unity among his coalition partners if they wanted him to stay in office, leaving his resignation threat hanging over parliament.

But Italian 10-year bond yields fell 12 bps on the possibility Draghi might remain. [GVD/EUR]

German 10-year bond yields fell 8 bps to 1.197%.

A closely-watched part of the U.S. yield curve remained inverted, with the two-year yield last at 3.1727%, down from the previous close of 3.2310%.

The yield on benchmark 10-year Treasury notes stood at 2.9707%, compared with its close of 3.019% on Tuesday.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.9%, driven by a 1.65% jump in resources-heavy Australia and 1.1% gain in Hong Kong stocks. Japan's Nikkei surged 2.67%.

Chinese shares rose 0.34%, lagging gains in other markets, as the central bank kept its benchmark lending rates unchanged amid a shaky economic recovery from COVID lockdowns.

The Bank of Japan also delivers a policy decision on Thursday, but is not expected to make any changes to its ultra-easy stance.

Oil prices slumped more than $1 a barrel, pressured by global central bank efforts to tame inflation and ahead of expected builds in U.S. crude inventories as product demand weakens.[O/R]

U.S. crude fell 1.65% to $102.50 a barrel while Brent crude dropped 1.67% to $105.57 per barrel.

Spot gold eased 0.13% to $1,708 an ounce.