GLOBAL MARKETS – U.S. and European stocks climb on hopes the Fed will slow the pace of rate hikes

By Chris Prentice and Amanda Cooper

WASHINGTON/LONDON, October 24 (Reuters)US stocks extended last week’s rally and European stocks rose on Monday as signs of a slowing US economy fueled hopes the Federal Reserve will slow its pace of rate hikes.

The Dow Jones Industrial Average .DJI rose 1.34%, the S&P 500 .SPX gained 1.19% and the Nasdaq Composite .IXIC added 0.86%.

The tech-heavy Nasdaq has recovered after being hit by the fall of Tesla Inc TSLA.O stocks and as traders awaited Apple earnings in the coming days AAPL.OGoogle parent alphabet GOOGL.O and Amazon.com AMZN.O.

Business activity in the United States contracted for a fourth consecutive month in October, suggesting that the Fed’s barrage of sharp interest rate hikes is having its intended effect, raising hopes that the central bank could start to slow the pace of increases in the target federal funds rate.

“Investors are increasingly confident that inflation will come down and the Fed could be quick to pause,” said Edward Moya, senior market analyst at OANDA in New York. “Flash PMI (Purchasing Managers Index data) showed significant weakness in the services and manufacturing sectors of the economy, which is good news for investors expecting for the Fed to take a break early next year.”

The dollar resisted another alleged Japanese intervention to rise against the yen, rising to 149.70 yen JPY=EBS in the first exchanges before withdrawing. Japan probably spent a record 5.4-5.5 billion yen ($36.16-36.83 billion) on its yen buying intervention last Friday, according to estimates by Tokyo money market brokerage firms. Japanese authorities have not confirmed whether or not there was an intervention.

The pound swung into volatile trade after news that Boris Johnson had dropped out of the race for the post of British Prime Minister. Finance Minister Rishi Sunak will become Britain’s next Prime Minister after wins the race at the head of the Conservative Party, which could reduce some of the political uncertainty weighing on the pound.

The European STOXX 600 index .STOXX ended up 1.4% at its highest level in nearly a week, utilities .SX6Pmedia .SXMP and travel and leisure .SXTP sectors leading gains. .EU

Markets are still pricing in a 75 basis point rate hike next month, but have cut bets on a corresponding move in December. The peak in rates also fell to around 4.87%, from more than 5% at the start of last week. FEDWATCH

Fed officials indicated that the pace of tightening would be at the heart of any policy debate at the November meeting.

chinese blue chips .CSI300 slid almost 3%, while Hong Kong shares fell 6.4%, their biggest one-day drop since the financial crisis. The offshore yuan hit a new high against the dollar CNH=D3 after Xi Jinping won a third term as head of a previous, choosing a superior governing body stacked with loyalists. Xi is expected to stick to his growth-damaging zero COVID policy, analysts say.

Deferred data on gross domestic product (GDP) showed China’s economy grew 3.9% in the third quarter, above a forecast of 3.5%, but retail sales disappointed, rising 2.5%.

Investors will get a glimpse of US GDP on Thursday and measures of underlying inflation a day later. The economy is expected to have experienced annualized growth of 2.1% in the third quarter.

The European Central Bank meets this week and is expected to raise rates by 75 basis points. 0#ECBWATCH

The Euro last traded at $0.98640 EUR=EBShaving briefly reached $0.9899 at the start of the session.

The Bank of Canada should also tighten by 75 basis points at its meeting this week.

In Treasury markets, traders shrugged off slowing corporate activity data, remaining concerned that the Fed would maintain its ultra-hawkish stance on fighting inflation. Yields soared.WE/

10-year US Treasury yields last traded at 4.2508% US10YT=RRafter a 15-year high of 4.337% on Friday.

In commodities, gold prices came under pressure from a strong dollar and high US bond yields. US gold futures GOL/

Brent futures LCOc1 pegged at $93.26 a barrel, down 0.3% and U.S. West Texas Intermediate crude CLc1 ended down 0.6% at $84.58 on lackluster demand from China and a stronger US dollar. WHERE

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(Reporting by Chris Prentice in Washington and Amanda Cooper in London Additional reporting by Amruta Khandekar, Devik Jain and Wayne Cole Editing by Nick Macfie, Will Dunham and Matthew Lewis)

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