The pound has rallied on speculation Prime Minister Liz Truss will perform another U-turn after the uproar over her government's debt-fuelled mini-budget

Hong Kong (AFP) - Asian equities soared Friday to extend a surge on Wall Street, where all three indexes saw extreme swings in response to a forecast-beating inflation report that cemented expectations for more big Federal Reserve rate hikes.

Sterling also held on to its big gains sparked by speculation the UK government was set to perform another U-turn on its debt-fuelled mini-budget, though the yen remained stuck around three-decade lows against the dollar.

The hotly awaited US inflation report showed prices rose last month at a faster clip than expected despite a series of interest rate increases this year, which have fanned fears of a global recession.

The month-on-month reading came in double estimates, while core inflation – which strips out volatile energy and food prices – was also elevated.

The figures sparked a sharp plunge on Wall Street but the selling quickly reversed, and all three main indexes finished the day with gains of more than two percent with analysts suggesting several reasons for the extreme move.

Some said the initial selling may have been a knee-jerk reaction before traders accepted the data was not as bad as other recent reports, while technical factors were also flagged.

Others speculated that equities had finally reached their bottom after a year of selling that has seen many indexes plunge into correction territory having lost more than 20 percent from their recent peaks.

“The market reversal was a head-scratcher”, said OANDA’s Edward Moya. “Some investors are convinced core inflation will soon start trending lower. Fed tightening will remain aggressive at 75 basis points in November and possibly December,” he added.

“Monetary policy is quickly getting restrictive and that will undoubtedly send inflation lower. It looks like rates will peak slightly above five percent and for some that is good enough of a reason to get back into stocks.”

However, he warned that “given the path for rates is higher, this market reversal won’t last long”.

Tokyo piled on more than three percent, while Hong Kong, Seoul, Taipei and Mumbai added more than two percent. There were also big gains in Sydney, Singapore, Wellington and Manila.

London, Paris and Frankfurt jumped at the open, extending Thursday’s gains.

There was little reaction to news that Chinese consumer inflation had hit a two-year high partly because of surging pork prices, though Shanghai was well up ahead of the start of a key Communist Party gathering at which Xi Jinping is expected to be named president for a third term.

- Yen weakness -

The pound held up after breaking higher Thursday on reports the new government could row back on more tax-cut pledges in its mini-budget, which sparked market turmoil when released two weeks ago.

Sterling sat above $1.13, with help also coming from Bank of England cash injections to prop up financial markets.

The pound’s stronger position came despite Prime Minister Liz Truss’s insistence that there would be no more U-turns, after she was previously forced to scrap a plan to cut the higher rate of income tax.

Finance minister Kwasi Kwarteng has returned early from Washington for an International Monetary Fund meeting to address the crisis.

While the BoE has said it intends to end its markets support Friday, analysts say will likely keep an eye on events.

“There is… an expectation that whatever the Bank of England and Governor (Andrew) Bailey says about ending the support for the gilt market today, if we get further turbulence next week, they will have little choice but to step in and provide liquidity to the market,” said CMC Markets’ Michael Hewson.

The US inflation data pushed the already strong dollar further up against other currencies and it hit a 32-year high of 147.67 yen. Traders are now looking to see Tokyo intervenes again to protect the unit.

Japanese finance minister Shunichi Suzuki told a Group of 20 gathering in Washington that authorities were “watching the foreign exchange markets with a high sense of urgency, and we’ll take appropriate responses against excessive moves”.

Officials refused to say if they intervened Thursday following a brief drop in response to the greenback’s spike.

The yen’s weakness comes from the Bank of Japan’s refusal to lift interest rates – citing a need to support the economy – as the Fed presses ahead with its big rate hikes.

- Key figures around 0720 GMT -

Tokyo - Nikkei 225: UP 3.3 percent at 27,090.76 (close)

Hong Kong - Hang Seng Index: UP 2.6 percent at 16,812.86

Shanghai - Composite: UP 1.8 percent at 3,071.99 (close)

London - FTSE 100: UP 1.1 percent at 6,927.14

Pound/dollar: DOWN at $1.1307 from $1.1333 Thursday

Dollar/yen: UP at 147.42 yen from 147.22 yen

Euro/dollar: UP at $0.9790 from $0.9780

Euro/pound: UP at 86.55 pence from 86.28 pence

West Texas Intermediate: UP 0.6 percent at $89.66 per barrel

Brent North Sea crude: UP 0.5 percent at $95.04 per barrel

New York - Dow: UP 2.8 percent at 30,038.72 (close)