© Reuters. A man is reflected on an electric monitor displaying a stock quotation board outside a bank in Tokyo, Japan, June 5, 2023. REUTERS/Issei Kato/Files

By Dhara Ranasinghe and Rae Wee

LONDON (Reuters) -World stocks rallied to their highest levels since late 2022 on Wednesday, with year-end optimism high on hopes that major central banks such as the U.S. Federal Reserve will start cutting interest rates early next year.

U.S. stock futures were flat a day after the touched its highest intraday level since January 2022. European shares were a touch higher, with trade generally subdued given public holidays across the region on Monday and Tuesday.

China’s November industrial profits posted double-digit gains as overall manufacturing improved, data showed, although soft demand continued to constrain business growth expectations, emboldening calls for more macro policy support.

MSCI’s world stock index touched a more than one-year high and is up 4.5% in December, while MSCI’s broadest index of Asia-Pacific shares outside Japan rose more than 1% to an over four-month high.

“We still have strong equity markets and that is likely to hold through to New Year,” said SEB chief economist Jens Magnusson.

A risk-on mood in world markets lifted the euro to more than four-month peaks against the dollar, while oil prices slipped as some major shippers returned to the Red Sea — an area disrupted after Yemen’s Houthi militant group began targeting vessels earlier this month.

Maersk shares fell more than 4.5%, and other shipping stocks fell, giving back part of this month’s gains fuelled by expectations that a Red Sea traffic halt could boost rates.

rallied more than 1%, and Hong Kong’s rose 1.7% in its first trading day after the Christmas and Boxing Day holidays. Chinese blue chips eked out a marginal gain of 0.35%.

Market pricing now shows a more than 80% chance the Fed is likely to begin cutting rates next March, according to the CME FedWatch tool, with over 150 basis points of easing priced in for all of 2024.

Tim Murray, a capital markets strategist in the multi-asset division at T. Rowe Price, noted much of the year had been spent in fear that rate hikes would drag the economy into recession.

“Happily, that did not happen, and a more dovish Fed means the likelihood of recession in 2024 has fallen considerably,” he said.

EURO SHINES

In currency markets, the dollar remained on the back foot and languished near a five-month low against a basket of currencies.

The euro touched its highest level since August, at $1.1055, while the dollar was 0.1% firmer against the yen at 142.51 following the release of minutes from a Bank of Japan policy meeting earlier this month.

BOJ policymakers remain divided over if, and when, the central bank should move away from its ultra-loose monetary stance, the minutes show.

futures slipped 0.2% to $80.89 a barrel, while U.S. WTI crude futures fell 0.5% to $75.37, pulling back from respective one-month highs hit the previous session.

Oil prices rose more than 2% on Tuesday as fresh attacks on ships in the Red Sea prompted fears of shipping disruptions. Still, major shipping firms such as Maersk and France’s CMA CGM said they were resuming passage through the Red Sea following the deployment of a multinational task force to the region.

SEB’s Magnusson said his main scenario was that disturbances to shipping would be short-lived although there were risks to disruptions further out.

“It is something to keep an eye on from an inflation perspective as we know now what disturbances in global transportation can do to inflation,” he added.

“It’s not my main scenario but there is a tail risk of escalation and that’s something that could impact risk appetite.”

Iran denied on Monday a U.S. claim that a drone launched from Iran had struck a chemical tanker in the Indian ocean.