European stock markets rallied Tuesday following gains in Tokyo and overnight on Wall Street as investors assess the outlook for interest rate hikes in the face of high inflation.

Asian markets closed higher in limited trade, driven by a rebound in tech firms, while comments from Federal Reserve officials played down concerns that the US central bank will embark on an aggressive phase of monetary tightening.

US equities jumped Monday with plenty of support coming from Apple's blowout earnings report last week, while the current reporting season has proved fruitful despite concerns about inflation and central banks withdrawing financial support.

"Good news is that some Federal Reserve officials are finally out trying to soothe investors' nerves, saying that they still want to avoid unnecessarily disrupting the US economy," said Swissquote analyst, Ipek Ozkardeskaya.

"The S&P 500 (on Wall Street) finished January with a strong two-day rally, but the index is still more than five percent lower than where it kicked off the year, having recorded its worst month since March 2020."

Easing concerns over aggressive US rate tightening weighed on the dollar.

Oil prices dipped as the world's top crude-producing countries prepare to meet Wednesday to discuss a further increase in output.

On Tuesday, Sydney shares ended in positive territory as the Australian central bank decided against raising interest rates to battle inflation, instead just announcing the end to its bond-buying stimulus from next week.

Traders are now awaiting policy decisions by the Bank of England and European Central Bank due Thursday, the eve of key US jobs data.

The surge on Wall Street on Monday came at the end of a volatile month characterised by speculation over the Fed's plans to get a grip on runaway prices, with fears that it could raise US borrowing costs as many as seven times this year, starting with a 50-basis-point move in March.

Comments from some leading Fed officials at the weekend added to expectations the policy board would go hard and fast, though some were out on Monday trying to play down such a move.

The Nasdaq closed up more than three percent Monday, paring losses for January to nine percent, having at one point been down almost 15 percent during the month.

Business was thin across Asia Tuesday owing to the Chinese New Year break that saw Hong Kong, Shanghai, Singapore, Seoul, Taipei, Manila and Jakarta closed.

Investors have been cheered by another surge on Wall Street and comments from Federal Reserve officials playing down the possibility of a big interest rate hike next month
Investors have been cheered by another surge on Wall Street and comments from Federal Reserve officials playing down the possibility of a big interest rate hike next month AFP / Daniel ROLAND

"Investors should not lose sight of the fact that the economy remains strong, which should limit downside from current levels," said And Solita Marcelli at UBS Global Wealth Management.

London - FTSE 100: UP 0.8 percent at 7,522.50 points

Frankfurt - DAX: UP 1.0 percent at 15,619.26

Paris - CAC 40: UP 1.0 percent at 7,067.28

EURO STOXX 50: UP 0.9 percent at 4,213.60

Tokyo - Nikkei 225: UP 0.3 percent at 27,078.48 (close)

Hong Kong - Hang Seng Index: Closed for a holiday

Shanghai - Composite: Closed for a holiday

New York - Dow: UP 1.2 percent at 35,131.86 (close)

Euro/dollar: UP at $1.1255 from $1.1235 late Monday

Pound/dollar: UP at $1.3496 from $1.3445

Euro/pound: DOWN at 83.40 pence from 83.54 pence

Brent North Sea crude: DOWN 0.3 percent at $89.04 per barrel

West Texas Intermediate: DOWN 0.2 percent at $87.96 per barrel