Global shares rise; Sterling rallies as dollar retreats

© Reuters. Silhouettes of passerby are seen as they stand in front of an electric monitor displaying Japan's Nikkei share average and world stock indexes outside a brokerage in Tokyo, Japan, October 21, 2022 REUTERS/Issei Kato

By Chris Prentice and Elizabeth Howcroft

WASHINGTON/LONDON (Reuters) -Wall Street continued its advance on Tuesday as weak data stoked hopes the Federal Reserve will slow its aggressive pace of interest rate hikes and European shares notched a second day of gains as better-than-expected earnings offset economic worries.

Sterling rallied to a six-week high as Rishi Sunak became Britain's prime minister, boosting investor sentiment. The U.S. dollar index fell to a three-week low, bolstering commodity prices.

U.S. Treasuries jumped after dismal data on home prices.

The Dow Jones Industrial Average rose 1.07%, the S&P 500 gained 1.63% and the Nasdaq Composite added 2.25%.

Europe's STOXX 600 index rose 1.4% to finish at a more than one-month high. MSCI's main European Index climbed 1.9% to end at its highest since mid-September.

Swiss bank UBS, among the companies that beat market expectations, rallied 7.7%. Europe's largest bank, HSBC (LON:HSBA), dropped after reporting a 42% slump in third-quarter profit.

The MSCI world equity index advanced 1.65% .

U.S. home prices fell more than expected in August, the S&P CoreLogic Case-Shiller index showed. Consumer confidence ebbed in October after two straight monthly increases.

"A lot of (the rally over the last week) is predicated on the Fed potentially slowing down. The housing data this morning is another example that bad news for the economy is good news for the stock market," said Chris Zaccarelli, chief investment officer of Independent Advisor Alliance in Charlotte, North Carolina.

Asian equities struggled to make gains due to uncertainty over whether President Xi Jinping's new leadership team would prioritise economic growth in China, where the onshore yuan finished the domestic session with its weakest close since late 2007.

The European Central Bank meets on Thursday and is expected to raise rates by 75 basis points.

The British pound was up 1.67% at $1.14715. On Monday , sterling recovered from session lows and gilt yields fell sharply in a sign of investor relief when former finance minister Sunak was named the next prime minister. But analysts said investors' confidence in the ruling Conservative Party's ability to manage the economy was still shaken.

Euro zone government bond yields fell, with the benchmark German 10-year yield traded at 2.17% .

The yield on 10-year notes fell to 4.0792%.

German business morale fell slightly in October, but the data still beat analyst estimates.

The data "suggests that at least business sentiment is forming a trough," said ING global head of macro Carsten Brzeski in a client note. "This, however, does not mean that any improvement in the economy is near."

U.S. business activity contracted for a fourth straight month, data on Monday showed, suggesting that the Fed's rate increases have softened the economy, which in turn raised hopes that the central bank could begin slowing the pace of the hikes.

Hani Redha, a portfolio manager at Pinebridge Investments, said some investors were relieved by "some hope that the pace of central bank tightening may start to slow later this year."

Economists polled by Reuters said the central bank should not pause until inflation falls to around half its current level.

Pinebridge's Redha said earnings estimates have been edging lower in recent months but that the pace of this has been "fairly modest."

"The potential relief that investors feel in terms of coming towards the end of the hiking cycle, that seems to dominate over the grinding lower of earnings estimates."

The weaker greenback boosted commodities, making them less expensive to holders of other currencies. U.S. gold futures settled 0.2% higher at $1,658, and spot prices were up 0.29%. [GOL/]

Brent crude prices rose 26 cents to settle at $93.52 per barrel, while U.S. West Texas Intermediate crude finished 74 cents higher at $85.32. Both benchmarks rose and fell by $1 during the session.[O/R]