Shares climb to 3-week high as rates debate hots up

World shares rose and the dollar and bond market borrowing costs held steady on Thursday ahead of U.S. inflation data and European Central Bank meeting minutes that will add to the hotly-contested debate on where interest rates are heading. The week's sharp escalation of Middle East tensions ensured the mood remained cautious but European stocks shuffled to a 3-week high early on after a 1.75 per cent jump from Tokyo had done the same for Asia.

Wall Street futures , were 0.3 per cent higher too, while the dollar was hovering near a two-week low after Fed meeting minutes on Wednesday had showed a caution about the economy starting to set in among rate-setters.

News that Central Huijin Investment, a Chinese state fund, raised stakes in the country's big four banks had also boosted confidence in the broader Asian market as Hong Kong's heavyweight Hang Seng index jumped 2.0 per cent.

China, however, has also issued a notice prohibiting domestic brokerages and their overseas units from taking on new mainland clients for offshore trading, which will restrict capital outflows, Reuters reported on Thursday.

The recent buoyancy in markets also owes much to comments from Fed officials suggesting U.S. interest rates - which tend to drive global borrowing costs - may have finally peaked.

U.S. Fed Governor Christopher Waller on Wednesday said higher market interest rates may help the Fed slow inflation and allow the central bank to "watch and see" if its own policy rate needed to rise again or not.

Waller has been among the most vocal advocates for higher interest rates to fight inflation, and his view added weight to similar statements this week by Fed Vice Chair Philip Jefferson and Dallas Fed President Lorie Logan.

European trading saw the dollar drifting near a two-week low, but the yen was still under pressure at 149.11 per dollar, just a whisker away from the 150 level that could spur intervention from Japanese authorities.

Markets moved to further trim the chance of a Fed hike in November to just 9 per cent, down from 13.2 per cent a day earlier, and there is a 70 per cent chance that the rate is already at its peak, according to CME FedTool.

With the long-awaited pivot for the Fed in sight, traders are bracing for the all-important U.S. consumer inflation report later. Stakes are even higher than usual after producer price inflation came in hotter than expected on Wednesday.

Economists expect the headline consumer price index (CPI) to haven risen 0.3 per cent in September on a monthly basis, slowing from 0.6 per cent in August. Core CPI is seen holding steady at 0.3 per cent.

Alan Ruskin, chief international strategist at Deutsche Bank, said an upside surprise in the core rate of 0.4 per cent or more would catch investors off guard, although geopolitical risk was likely to deter the bond market from trading too bearishly on stronger data.

"The more lasting impact to the data would likely come from a 0.4 per cent m/m core number, which would mean that the two most important data releases for September numbers (non-farm payrolls and CPI) would both be making a case for the Fed remaining hawkish," he said.

WAR WORRIES

Long-dated U.S. Treasury yields eased for a third straight session, also benefiting from some safe-haven demand from the escalation in the Israeli-Palestinian conflict following deadly attacks in Israel at the weekend. Ten-year U.S. yields eased 3 basis points to 4.57 per cent, off from a 16-year high of almost 4.9 per cent late last week. European government bond yields barely budged with Germany's Bund yield at 2.74 per cent.

Oil prices were edging higher again though after two days of falls and after top OPEC producer Saudi Arabia had pledged to help stabilise the market amid fears the Israel-Palestinian war could cause supply disruption.

Brent futures were up 1 per cent in London to $86.65 a barrel after a 2 per cent drop in the prior session. U.S. West Texas Intermediate crude rose 0.7 per cent to just about $84 following a 2.9 per cent plunge on Wednesday.

Gold was 0.3 per cent higher at $1,878.98 per ounce and at its highest in two weeks.

Christopher Granville, Managing Director, Global Political Research at TS Lombard pointed to Middle East violence only tended to have a big impact on broader global markets when it dovetailed with existing oil supply worries as it did in the run up to the second Gulf War.

"If you apply that lesson to the present, I think you have to look at Iran," Granville said, describing a "plausible risk scenario" where Israel made a strike on Iran for backing Hamas.

"If there is to be an impact on the global markets, then that is the one."