Stocks stabilise as investors weigh Taiwan and Fed risks

By Danilo Masoni

MILAN (Reuters) - World stocks stabilised on Wednesday as markets weighed risks from U.S. House Speaker Nancy Pelosi's visit to Taiwan and comments from Federal Reserve officials talking up the chance of aggressive interest rate hikes.

MSCI's benchmark for global stocks was broadly unchanged by 1127 GMT following Tuesday's drop that took the index off the multi-week highs hit after a rally in July.

China condemned the highest-level U.S. visit to Taiwan in 25 years as Pelosi pledged American solidarity to an island Beijing views as a breakaway province. Her plane left Taiwan at 1000 GMT.

Although China kicked off a burst of military activity in Taiwan's surrounding waters, investors took some comfort in expectations that Beijing's actions would remain demonstrative.

AFS Group analyst Arne Petimezas said the mood found support as Pelosi's visit "failed to invoke a truly aggressive response by Beijing".

"Still, China will be holding large military drills inside Taiwan’s territory this week. Those drills are larger and closer to the island then they were during the last Taiwan Strait crisis in 1996," he added.

In Europe, the STOXX 600 equity benchmark index edged up 0.2%, even after data showed business activity in the euro zone contracted slightly in July for the first time since early last year as consumers reined in spending.

Japan's Nikkei rose 0.5%, rebounding from Tuesday's two-week closing low, while Hong Kong's Hang Seng added 0.4% and Taiwan's TAIEX index rebounded from earlier losses to gain 0.2% at the close.

The MSCI's broadest index of Asia-Pacific shares fell 0.2%, giving up earlier gains.

U.S. stock futures rose around 0.4%, following the S&P 500's 0.7% drop overnight.

A trio of Fed policymakers signalled on Tuesday that there would be no let up in the tightening campaign aimed at taming the highest inflation since the 1980s, even though it will take rates to a level that will more significantly curb economic activity.

Two of them, San Francisco Fed President Mary Daly and Chicago Fed President Charles Evans, are widely seen as doves.

Their comments cooled the perception of a dovish pivot at the Fed, which helped markets rally in July, and come as investors increase the focus on data for more clues on a slowdown in U.S. economic growth.

"What we are seeing is a coordinated and well-crafted communication effort by the Fed," said Win Thin, currency strategist at Brown Brothers Harriman.

"It should leave no doubt as to the Fed's intent to keep hiking rates until inflation comes down, no matter the cost to growth and employment."

Traders see a chance of around 43.5% that the Fed will hike by another 75 basis points (bps) at its September meeting.

The benchmark U.S. 10-year Treasury yields added 3 bps to 2.772% after surging on Tuesday by 14 bps following the hawkish Fed officials' comments.

Germany's 10-year Bund yields, the benchmark for the region, were up around 8 bps at 0.862%.

The U.S. dollar index, which gauges the currency against six major peers, fell 0.3% to 106.06, having rebounded on Tuesday from a nearly one-month low at 105.03.

Gold gained 0.3% to $1,765.79 per ounce following a 0.7% retreat the previous session.

Oil prices dipped ahead of a meeting of OPEC+ producers which is expected to keep output steady with spare capacity limited and against the backdrop of fears that a slowdown in global growth will hit fuel demand. [O/R]

Brent crude futures fell 0.9% to $99.65 a barrel and West Texas Intermediate crude fell 0.8% to $93.66.