World stocks rebound in first major sign inflation may be peaking

World shares rebounded on Tuesday on the notion inflation may be peaking after Target Corp said it would offer deep discounts to clear inventory as consumers change their shopping habits, while Treasury yields fell after a surprise rate hike in Australia.

Target, a major retail chain, cut its quarterly profit margin forecast and said it would mark down prices in the second quarter in a surprise revision that sent shares of the retailer 2.31 percent lower.

Target, along with Walmart, had reported a much steeper-than-expected drop in quarterly profit in May, roiling the retail industry. The retail sector of the pan-European STOXX index on Tuesday closed down 0.94 percent.

But Target's warning was seen as having a positive impact on inflation and could help the Federal Reserve and other central banks fight the sharp rise in consumer prices without sharply boosting interest rates and sparking a deep slowdown.

"Target cuts both ways. On the one hand obviously it's negative news for Target. But on the other it's one of the first large signals that inflation may be peaking," said Rick Meckler, a partner at Cherry Lane Investments.

"Of course, this is the scenario of a soft landing. That we raise rates, that it reins in inflation some, but it doesn't stop the economy," he said.

The MSCI's benchmark for global stocks gained 0.40 percent, while the STOXX 600 index fell 0.28 percent - before the idea that Target aids the inflation fight took hold.

Anthony Saglimbene, global market strategist at Ameriprise Financial, said Target's announcement suggested more companies will begin to lay the groundwork for reduced earnings.

"We could see an earnings recession this year without seeing an economic recession, which would mean we would get zero earnings growth," he said. "That's a headwind for stocks."

On Wall Street, the Dow Jones Industrial Average rose 0.8 percent, the S&P 500 gained 0.95 percent and the Nasdaq Composite added 0.94 percent.

The Reserve Bank of Australia overnight raised rates by 50 basis points - the most in 22 years - and flagged more tightening ahead as it moves to restrain inflation.

Later this week, the European Central Bank is expected to start a tightening cycle.

"Central bankers are playing catch-up with the fact that inflation is very, very high and they need to kind of tamp it down through higher rates," Saglimbene said.

The yield on 10-year Treasury notes fell 5.3 basis points to 2.985 percent, below the key 3 percent threshold ahead of data on Friday expected to show still high U.S. inflation.

A high reading would firm up expectations that the Fed could raise rates more than the anticipated 50 basis points increase at its upcoming policy meeting next week and in July.

In Europe, benchmark 10-year German bund yields also dipped 1.6 basis points but held near Monday's highs ahead of the ECB meeting on Thursday. They last traded at 1.303 percent.

British Prime Minister Boris Johnson survived a no-confidence vote among his Conservative Party's lawmakers on Monday, but the thin margin of victory spurred talk of a move to replace him, hitting sterling and gilts.

Ten-year gilt yields touched a seven-year high at 2.279 percent before ending almost flat on the day.

In foreign exchange markets, the dollar index fell 0.146 percent, with the euro up 0.09 percent to $1.0704 on expectations of a hawkish ECB tilt.

The U.S. currency rose to its highest since 2002 against the yen and was last up 0.57 percent after the Bank of Japan governor promised support for the economy and easy monetary policy even as prices start to rise.

Sterling was last trading at $1.2592, up 0.49 percent on the day.

The Australian dollar gained as much as 0.76 percent just after the supersized RBA rate hike, but quickly shed gains to trade flat on the day.

Oil prices gained about 1 percent, with U.S. crude closing at a 13-week high, on supply concerns, including the lack of a nuclear deal with Iran and the prospect of higher demand after China relaxes lockdowns imposed to control the coronavirus pandemic.

U.S. crude futures rose 91 cents to settle at $119.41 a barrel, while Brent settled up $1.06 at $120.57.

Gold rose as the dollar gave up some gains, while investors positioned for U.S. inflation readings later this week for cues on the Fed's interest rate hike trajectory.

U.S. gold futures settled 0.5 percent higher at $1,852.10 an ounce.