By Dhara Ranasinghe

LONDON (Reuters) -World equity markets rallied on Wednesday lifted by hopes that inflation is peaking and a re-opening of China’s economy is near, with focus turning to U.S. Federal Reserve chief Jerome Powell who speaks later in the day.

The pan-European STOXX 600 index rallied 0.7% higher after three straight sessions in the red, while U.S. stock futures pointed to a firm open for Wall Street.

Data showed euro zone inflation eased far more than expected in November, raising hopes that sky-high price growth is now past its peak and bolstering the case for a slowdown in European Central Bank rate hikes next month.

A Santa rally appeared to come early for some markets, with Asian shares set for their strongest month since 1998 and emerging market stocks poised for their biggest monthly surge since 2009.

But the dollar, hit by expectations that a peak in U.S. interest rates is near, was set for its biggest monthly loss in more than 20 years.

Fed chief Powell will speak on the economy at the Brookings Institution in Washington later. These are likely to be his last public comments on monetary policy ahead of the blackout period before the Fed’s Dec 13-14 meeting.

I’m not sure if markets are looking for a pivot but we think he will stress the Fed is nowhere near the end of its tightening cycle,” said James Rossiter, head of global macro strategy at TD Securities in London.

CHINA HOPES

Investors looked past disappointing business activity data from China and an escalation of protests in some parts of the country over stringent COVID-19 lockdowns, pinning hopes instead on a quicker reopening of the world’s No.2 economy.

MSCI’s broadest gauge of Asia Pacific stocks outside Japan rallied more than 1% to its highest since September. It was set for its best month since 1998.

Hong Kong’s Hang Seng Index rallied more than 2%, although Japan’s blue-chip Nikkei fell 0.2%.

Investors appeared to view protests in China as a catalyst for the economy opening up again after stringent COVID lockdown moods. Chinese officials on Tuesday said the country would speed up COVID-19 vaccinations for elderly people.

Markets are cheering the fact that the government is close to pivoting on COVID-19,” Raphaël Gallardo, chief economist at Carmignac said in a webinar on the firm’s 2023 outlook.

We can say with confidence that a reopening is coming but it’s because the authorities will be overwhelmed with the number of (COVID) cases in the coming months.

Hopes for a China reopening alongside an expectation that inflation and central bank interest rates may be close to peaking meant that November looks set to end as great month for many markets.

China property stocks are up 70% this month, poised for their best ever month. They had dropped over 80% since start of 2020.

And a rally in emerging markets was in full swing, with MSCI’s emerging market stock index up around 14% in November and set for its best month since May 2009 and.

Optimism that demand from China will improve also helped lift Brent crude futures up 2.5% to $85.09 per barrel. U.S. West Texas Intermediate crude futures climbed 1.78% to almost $80 per barrel.

FED TALK

Signs that U.S. inflation is peaking, meaning the Fed can slow the pace of its aggressive rate hikes, has boosted government bond markets but dented the robust dollar.

The yield on the U.S. 10-year Treasury yield was down 2.5 basis points at around 3.72% and has fallen over 30 bps this month – set for its biggest monthly drop since March 2020.

Even if the surprise slowdown in inflation is good news, it is only the first in a long series of conditions the Fed needs to see before it pauses its hiking cycle,” said ING senior rates strategist Antoine Bouvet.

Longer-term, the direction of travel is indeed towards lower inflation and an end to this tightening cycle but we expect the Fed to take Fed Funds rates some 100 bps higher than currently, just under 5%, before this is the case.

The U.S. dollar index, which measures the performance of the greenback against six major currencies, fell 0.4% to 106.44.

It has lost around 4.5% in November, making this its biggest one-month drop since 2010.

The euro was up 0.3% at $1.0363, while sterling was 0.5% firmer at $1.2016 .

(Reporting by Dhara Ranasinghe; additional reporting by Kane Wu in Hong Kong and Marc Jones and Amanda Cooper in London, Editing by Jane Merriman and Chizu Nomiyama)