GLOBAL MARKETS-Global stocks pare gains as geopolitical tensions rattle markets

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NEW YORK, Nov 15 (Reuters) - Stocks pared gains and the dollar rebounded against the euro after media reports that Russian missiles killed two people in Poland, a strike that raised fears the nine-month Ukraine war could escalate.

The Dow Industrials straddled break-even and the dollar also see-sawed to trade little changed as firefighters reported two people died in an explosion in a village in eastern Poland near the border with Ukraine, Reuters reported.

Other media said the deaths were due to missiles fired in what Kyiv said was the heaviest wave of strikes since Russia invaded Ukraine in February.

The White House said it could not confirm the reports while Russia’s defence ministry denied the reports, describing them as “a deliberate provocation aimed at escalating the situation”.

The market was overstretched after U.S. consumer and producer price data last week and on Tuesday suggested inflation was coming off its peak, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

“The market is particularly sensitive now that Ukraine has taken back more territory that Russia had captured after the war began,” Chandler said.

The strike in Poland, if confirmed, is reminiscent of U.S. bombs that killed three people in the Chinese Embassy in Belgrade in 1999, he said.

“It did not trigger a war. It was a tragic accident. This is along those same lines,” Chandler said.

Stocks had rallied and bond yields slid further early on Tuesday after the Labor Department reported that U.S. producer prices increased just 0.2% in October.

On an annualised basis, PPI rose 8.0% after climbing 8.4% the previous month. Economists polled by Reuters forecast monthly PPI rising 0.4% and advancing 8.3% year-on-year.

The reading was better than expected and bolstered the risk-off mood sparked last week by cooler-than-expected data on U.S. consumer prices that gave investors hope the Federal Reserve can curb its aggressive interest rate hikes to tame inflation.

“The market is sniffing out the end of the Fed rate hike cycle,” said Peter Duffy, chief investment officer of credit at Penn Capital Management Co LLC in Philadelphia.

“The market is taking a big sigh of relief because the Fed has had to talk so tough. As soon as these numbers can start coming down, even if it’s a slow walk down in inflation, the market will be relieved.”

Fed funds futures showed a further drop from above 5% last week in expectations for the U.S. central bank’s target rate, pricing in a peak at 4.9% next May and June.

The likelihood the Fed hikes 50 basis points in December rose to a 91% probability, up from 71.5% last week.

MSCI’s gauge of stocks across the globe gained 1.19%, while its emerging markets index rose 2.20%.

On Wall Street, the Dow Jones Industrial Average rose 0.33%, the S&P 500 gained 1.06% and the Nasdaq Composite added 1.74%.

Big moves in the dollar, among other assets, suggested investors were dramatically changing their positions after the CPI and PPI reports, Chandler said.

The euro was up 0.48% to $1.0375 and the yen strengthened 0.60% versus the dollar at 139.04.

The benchmark 10-year Treasury yield fell to a six-week low of 3.758% and was last down 7.1 basis points to 3.796%. The 10-year has fallen 30 basis points since Thursday.

Chinese and Hong Kong stocks rallied overnight as investors digested China’s COVID-19 policy adjustments, a property sector rescue package, and a cooling in tensions between the U.S. and China.

Beijing last week eased some of its strict COVID rules, though there has been a sharp increase in new infections in some cities this week.

Hong Kong’s Hang Seng Index surged 4.11% overnight. The index is up nearly 25% for the month while China’s CSI 300 has gained 10% in that time.

U.S. President Joe Biden and Chinese President Xi Jinping held a three-hour meeting on Monday in Bali on the sidelines of the G20 gathering. Investors welcomed the two countries’ pledge of more frequent communications.

Data out on Tuesday showed that the British unemployment rate rose in September. German business sentiment saw a stronger-than-expected rise in the closely watched ZEW survey.

U.S. crude futures settled up $1.05 at $86.92 a barrel, while Brent futures rose 72 cents to settle at $93.86.

U.S. gold futures settled little changed at $1,776.80 an ounce.

Bitcoin rose 1.92% to $16,907.00, but remained around 20% lower for the month. The collapsed FTX crypto exchange outlined a “severe liquidity crisis” in bankruptcy filings released on Tuesday.

Reporting by Herbert Lash, additional reporting by Harry Robertson; Editing by Bradley Perrett, Simon Cameron-Moore, Ken Ferris, Emelia Sithole-Matarise and Susan Fenton