LONDON, Jan 10 (Reuters) – Global shares fell for the first time in three days on Tuesday, after comments from two Federal Reserve officials injected a note of caution over the U.S. rate outlook, knocking equities, commodities and other risk assets.

The MSCI All-World index (.MIWD00000PUS) fell 0.2%, but remained in sight of Monday’s three-week high, while the dollar – a gauge of investor risk appetite – edged up against a basket of major currencies.

In the past six weeks, China has dismantled its zero-COVID policy even as cases have surged around the country, which has given markets a bumpy ride as investors weighed up the economic benefits of reopening against the impact to activity from the wave of infections.

Adding to that has been a sense of optimism that inflation has peaked, especially in the United States, and, as such, the Fed will not have to raise rates as much as many had feared.

However, with consumer price pressures still well above the central bank’s target of 2%, two Fed officials on Monday issued a stark reminder that interest rates will have to keep rising, no matter what investors have priced in.

“The market is trying to get one step ahead of the Fed, but it’s not actually listening to what it’s saying. And the Fed is being quite clear with its message – that rates are going to push higher and they’re going to stay higher for longer,” CityIndex strategist Fiona Cincotta said.

“If we look at expectations of inflation later this week – the big focus – core inflation is still expected to remain high. It doesn’t matter which way you look at it. It’s still higher than the target the Fed is aiming for,” she said.

U.S. consumer price data, due on Thursday, is expected to show headline inflation slowed to 6.5% in December from 7.1% in November.

The data could be key to setting expectations for what happens with rates at the Fed’s next policy meeting and beyond.

San Francisco Fed President Mary Daly told the Wall Street Journal she would pay close attention to Thursday’s data and both 25- and 50-basis point hikes were options for her. Atlanta Fed President Raphael Bostic said his “base case” was for no rate cuts this year or next.

“The main theme overnight was cautiousness in the equity space as stocks pared gains after hawkish comments from two Fed officials. Raphael Bostic and Mary Daly said the Fed would likely hike (interest) rates to above 5% and hold them there for some time,” Commerzbank said in a note.

Fed Chair Jerome Powell addresses a conference on central bank independence later on Tuesday and investors will likely scour his remarks for any signal on monetary policy.

“Given that the recent rebound in equity markets and fall in bond yields and the US dollar is loosening financial conditions, today might offer an opportunity for Fed chairman Jay Powell to reset the narrative slightly,” CMC Markets chief strategist Michael Hewson said.

FRAGILE CHINA

In Europe, the STOXX 600 (.STOXX), which on Monday hit its highest in eight months, fell 0.7%, led by a decline in industrials. London’s FTSE 100 (.FTSE) lost 0.2%, while Frankfurt’s DAX (.GDAXI) fell 0.5%.

U.S. stock index futures , fell 0.3%, indicating Wall Street could open a touch lower after a volatile session the previous day.

The dollar carved out gains against the Australian dollar , which is highly sensitive to the Chinese economy and has gained 3.5% in the last three weeks alone, based on the optimism around reopening.

The Aussie was last down 0.5% at $0.6877, while the offshore yuan lost 0.1% against the dollar to trade around 6.7913. It reached its strongest level since mid-August the previous day.

The dollar index rose 0.2%. The euro was flat, while the pound fell 0.3%. The yen fell 0.1% against the dollar to 132.06, even after data showed a faster pick-up in Tokyo inflation that could prompt the Bank of Japan to tighten monetary policy more quickly.

Strategists at BlackRock, the world’s largest asset manager, on Tuesday said they expected the Chinese economy to grow by 6% this year, which should cushion the global slowdown as recession hits developed-market economies. But any bounce may be fleeting.

“We don’t expect the level of economic activity in China to return to its pre-COVID trend, even as domestic activity restarts. We see growth falling back once the restart runs its course,” Wei Li, who is global chief investment strategist for the BlackRock Investment Institute, wrote in a note.

Copper eased back from six-month highs , as bullishness from China’s emergence from COVID-19 was offset by concern about the risks of a broader global downturn.

London Metal Exchange copper futures fell 0.5% to $8,813 a tonne, having hit their highest in over six months on Monday, while zinc fell 0.7% and lead dropped 2%.

Oil pared earlier losses, but concern persisted that China returning to more normal activity may not translate into a boom in energy demand.

“The social vitality of major Chinese cities is rapidly recovering, and the restart of China’s demand is worth looking forward to. However, considering that the recovery of consumption is still at the expected stage, the oil price will most likely remain low and range-bound,” analysts from Haitong Futures said.

Brent crude futures were last up 0.4% to $80.00 a barrel. The oil price is about 2.3% below where it was a year ago and 45% below the highs around $139 after Russia invaded Ukraine last February.

Additional reporting by Selena Li in Hong Kong; Editing by Muralikumar Anantharaman, Angus MacSwan and Chizu Nomiyama

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