MILAN/SINGAPORE, Nov 15 (Reuters): World shares extended gains on Wednesday and the dollar nursed its losses, as expectations of an end to a global rate hike cycle spurred on investors following benign inflation readings in the United States and Britain. The MSCI world equity index, which tracks shares in 49 countries, rose 0.5 per cent to its highest since mid-September, following a positive start in Europe and a rally across Asia, aided by a report of stimulus in China.
The pan-European STOXX 600 index rose 0.8 per cent after data showed British inflation cooled more than forecast in October, hitting sterling and reinforcing bets the Bank of England will be cutting interest rates by the middle of next year.
"This sends a clear sign that the Bank's aggressive interest rate hikes are paying off, albeit slowly and at the expense of subdued economic activity," said Jeremy Batstone-Carr, at strategist at Raymond James.
"With the laggard impact of interest rates still to be felt, economic activity will likely remain weak in the months to come, leading to incremental eases on price pressures," he added.
The British consumer price index rose by 4.6 per cent in the 12 months to October, slowing from September's 6.7 per cent increase, according to the Office for National Statistics.
On Tuesday, data showed US headline consumer prices were flat in October, against expectations for a 0.1 per cent rise. Core CPI, at 0.2 per cent, also came in below a forecast of 0.3 per cent.
"I think the CPI number has just pushed the last person to cover their shorts," Naka Matsuzawa, Nomura's chief macro strategist, said on the phone from Tokyo.
He sees a "more complicated" process ahead, where stock market exuberance eventually collides with bond market expectations that an economic slowdown will drive rate cuts.
On Tuesday, the Nasdaq jumped 2.4 per cent and the small-cap Russell 2000 index leapt 5 per cent, although gains were set to lose momentum with US futures up around 0.3 per cent.
The dollar sputtered after slumping on Tuesday following the softer US inflation print. The dollar index , which measures the currency against a basket of peers, stood at 104.2, not far from Tuesday's two-month low of 103.98.
Interest rate futures swung to price in an interest rate cut by the US Federal Reserve as early as May, with a 30 per cent chance it could come even sooner, in March.
After dropping 19 basis points (bps) on Tuesday in their biggest one-day drop since March, 10-year Treasury yields eased another basis point to steady around 4.43 per cent. Ten-year German bond yields fell 2 bps.
US retail sales, due at 1330 GMT, and an expected morning meeting between US President Joe Biden and his Chinese counterpart Xi Jinping in San Francisco were the next focus for financial markets.
Sterling slid 0.3 per cent to $1.246 as the cooler inflation print helped the British currency reverse part of Tuesday's surge against a falling dollar. That helped London stocks outperform, up 1.1 per cent. . The euro inched 0.1 per cent lower at $1.086.
Adding to markets' cheer was strong industrial output and retail sales data in China and a report from Bloomberg News that China plans to provide 1 trillion yuan ($137 billion) of low-cost financing to boost the housing market.
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