World stocks hit five-week peak, as dollar continues retreat

Sterling continues rally, hits highest since mid-September

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Britain delays tax and spending plan announcement to mid-Nov

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Graphic: Global asset performance http://tmsnrt.rs/2yaDPgn

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Graphic: World FX rates http://tmsnrt.rs/2egbfVh

By Chris Prentice and Dhara Ranasinghe

WASHINGTON/LONDON, Oct 26 (Reuters) - World stocks rose to a five-week peak on Wednesday in choppy trading as U.S. shares were mixed, with investors weighing disappointing earnings from U.S. heavyweights with hopes the Federal Reserve will slow its aggressive pace of interest rate hikes.

The U.S. dollar index fell to a five-week low as the pound touched its highest since Sept. 13, continuing its rally after Rishi Sunak became Britain's prime minister.

News that the British government's plan to repair the country's public finances will be delayed by more than two weeks to Nov. 17 pushed up bond yields.

Wall Street was mixed. The Dow Jones Industrial Average rose 0.51%, the S&P 500 lost 0.13% and the Nasdaq Composite dropped 0.97% at 10:37 a.m. EDT (1437 GMT)

MSCI's World Stock Index was up 0.36% and touched a five-week high. Europe's Stoxx 600 also touched a five-week high in choppy trade.

Google owner Alphabet posted softer-than-expected ad sales after Tuesday's close and Microsoft missed revenue forecasts, while a warning from Dutch semiconductor supplier ASM added to concerns about slowing economic growth.

Some of Europe's largest banks warned of growing risks as the economy fizzles after posting stronger-than-expected profits, helped by a trading boom in volatile markets and higher interest rates. Deutsche Bank posted a better-than-expected jump in third-quarter profit, and Britain's Barclays also beat profit forecasts.

Asian shares rallied, in a sign that some investors were taking comfort from a perception that a turn in the global rate-hike cycle may be near.

Although the Fed is widely expected to deliver another 75 basis points hike in November, a sense that the Fed could then start to slow its aggressive tightening cycle has lifted sentiment in share markets and taken the edge off a dollar rally.

"I wouldn't want to take the optimism too far. We think it's still too soon for the Fed to make a significant pivot and the stronger markets are, the more likely it is that the Fed wants to be more cautious about wanting to make a pivot," said Andrew Sheets, chief cross-asset strategist at Morgan Stanley.

Sheets also noted "more downside risk" for earnings.

Data on Tuesday showed slowing home price growth and souring consumer confidence, with some signs that the Fed's aggressive rate hikes are starting to cool the labor market.

"It does feel like it is too early to declare the 'all-clear' for equity markets – for example the Fed could well push U.S. real rates deeper into restrictive territory – meaning that we are treating this dollar decline as corrective," said Chris Turner, global head of markets at ING.

The Bank of Canada, meanwhile, announced a smaller-than-expected rate raise of 50 percentage points. That put its policy rate at 3.75%, a 14-year high but coming up short on calls for another 75 basis points move to contain stubbornly high inflation.

MSCI's broadest index of Asia-Pacific shares outside Japan rallied more than 1%, while Japan's Nikkei hit its highest level since Sept. 20.

The euro pushed back above $1 for the first time in five weeks.

In Australia, inflation raced to a 32-year high last quarter as the cost of home building and gas surged. The surprise added pressure on the central bank to reverse a recent dovish turn, though markets doubt there will be a dramatic shift.

The Aussie dollar rallied more than 1%.

China's yuan rebounded sharply to close the domestic session at the strongest level in two weeks, as traders and corporate clients raced to liquidate long dollar positions.

Market participants became cautious after major state-owned banks were spotted selling the dollar on Tuesday to stabilize the market, traders said.

Investors increased bets on the Bank of England raising its benchmark rate by a full percentage point on Nov. 3 after the news and put the chances of such a move at around 37%, higher than before the announcement of the delay.

Gold prices jumped as the dollar and bond yields weakened. Spot prices were up 0.82%.

Elsewhere in commodities, oil prices rose on the weaker dollar and supply concerns. U.S. crude rose by $2 per barrel.