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LONDON   - U.S. stock index futures rallied on Wednesday ahead of the outcome of a Federal Reserve policy meeting, with rate hikes this year already priced in, while oil rose towards recent seven-year highs on tension between Russia and Ukraine.

The Fed is due to update its policy plan at 1900 GMT after a two-day meeting. A first rate increase is seen in March, and three more quarter-point increases are expected by year-end.

U.S. S&P futures jumped 1.34%, indicating a stronger open on Wall Street, after the S&P 500 index lost 1.22% in the previous session.

Nasdaq futures rose 2% after Microsoft Corp jumped in pre-market trading, as the tech giant forecast revenue for the current quarter broadly ahead of Wall Street targets..

The Nasdaq Composite lost 2.28% on Tuesday.

The MSCI world index rose 0.35%, European shares climbed 1.97% and Britain's FTSE 100 gained 1.71%.

"There was some froth in markets, particularly in the U.S. and particularly in tech and some of that air has come out," said Fahad Kamal, chief investment officer at Kleinwort Hambros.

"I don't think this is a dead cat bounce -- we are nowhere near recession by any measure."

U.S. stocks posted their worst week since 2020 last week. The MSCI index is also on course for its biggest monthly drop since the COVID-19 pandemic hit markets in March 2020, though analysts at Goldman Sachs said equities had not reached "danger zone" levels.

Sebastien Galy, senior macro strategist at Nordea Asset Management, said that given the recent volatility, he expected the Fed would be "far more cautious about the timing and pace of the balance sheet reduction and that will be welcomed by the equity market".

The Fed's balance sheet roughly doubled in size during the pandemic to nearly $9 trillion, as it snapped up bonds to help keep longer-term interest rates down to support the economy.

But this has led to rising inflation, excessive leverage, and high valuations in certain segments of the stock market.

Growing tension as Russian troops massed on Ukraine's border have added to a risk-averse environment for investors.

U.S. President Joe Biden said on Tuesday he would consider personal sanctions on President Vladimir Putin if Russia invaded Ukraine, as Western leaders stepped up military preparations and made plans to shield Europe from a possible energy supply shock.

Brent crude rose 0.61% to $88.81 per barrel. It reached $89.50 on Jan 20, the highest since October 2014.

U.S. crude rose 0.4% to $85.95 a barrel. [O/R]

Kristina Hooper, global market strategist at Invesco, said that if there was an invasion, "the ensuing sanctions against Russia could drive up the price of oil, which in turn could add to inflationary pressures in the short run".

However, Ukraine and Russia's government bonds rallied, with political advisers from Russia, Ukraine, France and Germany due to hold talks in Paris. Andriy Yermak, chief of staff to Ukraine's president, tweeted on his arrival in Paris that it was "a strong signal of readiness for a peaceful settlement".

The dollar index edged up to 96.09 against a basket of major currencies, while the euro fell 0.2% to $1.1277, near one-month lows set on Tuesday.

The Canadian dollar strengthened around 0.5% to 1.2568 versus the dollar. Odds are split on whether or not the Bank of Canada will raise rates for the first time since 2018 on Wednesday, with Omicron seen potentially delaying the start of an aggressive tightening campaign aimed at taming inflation.

The yield on benchmark 10-year Treasuries was 1.7886%, off a two-year high of 1.9% hit last week. [US/]

German 10-year government bond yields were little changed at -0.072%.

MSCI's broadest index of Asia-Pacific shares outside Japan was flat, after sharp losses earlier in the week which have left the index off 2.8% this year.

Japan's Nikkei closed down 0.44%, after hitting its lowest since December 2020.

China's blue-chip index hit its lowest since October 2020 before backing up to close 0.72% higher. Hong Kong's Hang Seng Index was up 0.19%.

Gold prices ticked down to $1,845 per ounce, after hitting a 10-week high in the previous session. [GOL/]