Cautious Yellen drives world stocks near 2016 peaks

London: World stocks climbed near the highest levels this year on Wednesday as investors rowed back expectations for how fast and how far US interest rates might rise, bruising the dollar and boosting sovereign bonds. 

Wall Street was set to build on Tuesday`s gains, which saw the S&P 500 recorded its highest close of the year after Federal Reserve Chair Janet Yellen urged caution on further rate hikes in the world`s largest economy amid calls from some policymakers for faster action. 

The dollar was set for its worst quarter in five years against a basket of currencies, weakening further after its biggest one-day fall in nearly two weeks.

That move pumped up the euro to its highest in almost two weeks and pulled Germany`s 10-year bond yields - the European benchmark towards record lows, as markets shrugged off German inflation data showing that the European Central Bank`s expansionary monetary policy may be gaining traction.

"She (Yellen) seemed very biased towards the dovish side and the market is taking that as a signal that the Fed is maybe trying to engineer a weaker currency or a more buoyant financial market, or possibly both," Altana Hard Currency Fund manager Ian Gunner, said. 

Futures markets dialed back their expectations of a rate hike to late 2016 from mid-year, in what some analysts said might be a slight overreaction.

The MSCI world equity index, which tracks shares in 45 countries, rose 0.8 percent to 397.84, the closest it has been to highs of over 399 set in early January.

The pan-European FTS Eurofirst 300 index advanced 1.4 percent after Asian shares outside Japan reversed four sessions of losses to jump 2 percent.

Japan`s Nikkei was a rare loser, nudged lower by a rise in the yen against the dollar.

Debt markets rallied in response to Yellen`s speech, with yields on 10-year US paper dropping 7 basis points to a one-month low of 1.80 percent. German equivalents fell 2 bps to 0.13 percent, within touching distance of this year`s trough of 0.102 percent and an all-time low of 0.05 percent hit last year.

Bund yields gave up some of those early falls after inflation data from Germany`s regions showed consumer price growth in the bloc`s powerhouse likely turned positive in March, but remained lower on the day.

"It looks like a bounceback in Germany after a soft set of February data, but the big picture is still one of very low inflation," Kenneth Wattret, co-head of European market economics at BNP Paribas, said in the Reuters Global Markets Forum.

"If you can`t generate inflation there, there is not much chance for the rest of the euro zone. The ECB is trying hard but it`s going to be a long wait for inflation lift-off."

The drop in the dollar helped oil prices regain a little ground, as did a forecast that US  stockpiles may have grown by less than first thought.

US crude added 70 cents to $38.98 a barrel, after falling around 3 percent on Tuesday. Brent rose 57 cents to $39.70.

Gold was down slightly at $1,235.16 an ounce, after rising almost 2 percent overnight.