World shares edge up, but bonds buffeted by Fed disappointment

World shares edged up on Wednesday, though investors stayed cautious at the prospect of US interest rates staying higher for longer, which in turn pushed Treasury yields to five-month highs and buoyed the dollar.

European shares gained 0.7 per cent, supported by personal and household goods stocks, after notching their worst session in nine months a day earlier on geopolitical tensions in the Middle East.

US stock futures, meanwhile, turned positive after Wall Street had fallen on Tuesday.

US Federal Reserve Chair Jerome Powell said on Tuesday that recent inflation data, with three months of upside surprises, had not given policymakers enough confidence to ease policy soon. The central bank may need to keep rates higher for longer than previously thought.

Markets have already slashed bets on the number of U.S. rate cuts this year to fewer than two, a sea change from about six cuts predicted at the beginning of the year. The first-rate cut is still expected in September, although the market's confidence in that has declined.

Tensions between Iran and Israel also kept a cap on riskier bets, said Alexandre Marquis, senior portfolio manager at asset manager Unigestion. Markets had already priced in the prospect of fewer rate cuts than previously hoped, he added.

"Part of the disappointment was already in the price, with the recent correction we have seen in the last few days," said Marquis.

The MSCI world equity index, which tracks shares in 47 countries, was flat.

Powell's comments kept the dollar broadly steady, which in turn rooted the Japanese yen near 34-year lows.

Two-year Treasury yields tested 5 per cent overnight, and were last at 4.9642, on the diminishing expectations of Fed easing this year, while 10-year yields held near a five-month high. Yields move inversely to prices.

Euro zone bond yields paused for breath, trading near a 1-1/2-month high. Germany's benchmark 10-year yield was last 0.3 basis points higher on the day at 2.48 per cent.

Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.3 per cent, after plunging more than 4 per cent in the past three sessions. Japan's Nikkei, however, dropped 1.3 per cent to its lowest in two months.

Still, Taiwanese shares outperformed regional stocks with a gain of 1.6 per cent, as chip-making giant Taiwan Semiconductor Manufacturing Co rose 2 per cent ahead of its earnings report.

SLOW BUT STEADY

The International Monetary Fund said on Tuesday that the global economy was set for another year of slow but steady growth, with US strength pushing world output through headwinds from lingering high inflation, weak demand in China and Europe, and spillovers from two regional wars.

Underscoring the threat of escalation in the Middle East, Britain's foreign minister David Cameron said during a visit to Israel on Wednesday that Israel had decided to retaliate against Iran for missile and drone attacks.

The dollar index, which measures the greenback against its major peers, was last down 0.2 per cent at 106.19. The beleaguered yen was last steady at 154.60 per dollar as the prospect of Japanese government intervention in currency markets loomed, though so far there has been no action from Tokyo beyond verbal warnings.

"In the dollar, you have a confluence of geopolitical concerns and a changed expectation for the Fed," said Dan Kemp, chief investment officer at Morningstar. "Energy prices may play into that a little bit, but I guess that the impact will be overwhelmed by what is happening with those other two factors."

In commodities, oil prices slipped as demand concerns outweighed heightened tension in the Middle East. Brent futures fell 0.8 per cent to $89.27 a barrel, while U.S. crude dropped 0.8 per cent to $84.64 a barrel.