A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, December 11, 2018.
A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, December 11, 2018. Reuters / Francis Mascarenhas

World stocks recovered ground on Wednesday as markets watched for signs of light in the Ukraine conflict, while Treasury yields hit their highest since mid-2019 in anticipation of the first U.S. interest rate hike in three years.

Chinese stimulus hopes also boosted stocks.

Ukrainian President Volodymyr Zelenskiy said on Wednesday peace talks between Russia and Ukraine were sounding more realistic but more time was needed, as Russian air strikes killed five people in the capital Kyiv and the refugee tally from Moscow's invasion reached 3 million.

Russia's foreign minister Sergei Lavrov also said some formulations of agreements with Ukraine were close to being agreed.

Western governments have slapped tough sanctions on Russia for the invasion, which Moscow calls a "special operation".

"These sanctions probably are working, hopefully that will put some pressure on both sides to get around the table and negotiate," Gregory Perdon, co-chief investment officer at Arbuthnot Latham, said. He added that the invasion could dampen the pace of Fed rate hikes.

"I don't see this as a flash in the pan military conflict, it has resulted in a big shock to the oil market."

Investors are expecting the U.S. Federal Reserve to raise interest rates by at least 25 basis points amid surging prices later on Wednesday. Traders will also be closely watching the Fed for details on how it plans to end its bond-buying programme.

The MSCI world equity index rose 0.87%, moving away from one-year lows hit in the previous session. S&P futures gained 0.79% after U.S. stocks enjoyed a relief rally overnight on Wall Street, driven by hopes of a resolution in Ukraine.

The S&P 500 gained 2.14%, the Nasdaq Composite jumped 2.92% and the Dow Jones Industrial Average rose 1.82%.

European stocks gained 2.2% and MSCI's broadest index of Asia-Pacific shares outside Japan jumped 4.2% after China's Vice Premier Liu He said Beijing will roll out more measures to boost the Chinese economy, as well as favourable policy steps for capital markets.

Chinese stocks were up 4.2%.

On Wednesday, Chinese health authorities reported a slight drop in new COVID-19 cases compared with a day earlier, although major Chinese cities continue to grapple with controlling the spread of the virus.

U.S. 10-year Treasury yields rose to 2.204% on the Fed rate hike hopes, their highest since June 2019. The five-year yield rose to 2.149%, its highest since May 2019.

Germany's 10-year government bond yield rose to its highest since Nov. 2018 at 0.387%.

Russia has $117.2 million in interest payments due on two dollar-denominated eurobonds on Wednesday. Its finance ministry has said it will make the payments in roubles if sanctions prevent it from paying in dollars - a move markets would view as a default.

The U.S. dollar was down 0.2% against a basket of peers, trading at 98.708, and steady versus the yen at 118.30 albeit close to the previous session's five-year high.

Japan reported a wider-than-expected trade deficit in February as an energy-driven surge in import costs caused by massive supply constraints added to vulnerabilities for the world's third-largest economy.

The euro gained 0.33% to $1.0989.

Markets are currently juggling geopolitical risks, macro-economic risks, price risks and central bank reactions, Commerzbank analysts said.

"If one of the balls is ignored it is possible that they all go everywhere, in the shape of prices going berserk."

Oil prices have been volatile since the Ukraine invasion.

Global benchmark Brent crude rose 2.38% to $102.22 per barrel, and U.S. crude added 1.62% to $98.08. [O/R]

Spot gold was little changed at $1,918.95 per ounce. [GOL/]

(Editing by Simon Cameron-Moore, Kim Coghill and Andrew Heavens)