Asia shares win reprieve as bond rout pauses for now

TOKYO A pause in both the sell-off in global bonds and sharp rise in the dollar following Donald Trump’s election victory, together with Wall Street’s record high overnight helped Asian shares steady on Wednesday from a four-month low struck a day earlier.

President-elect Trump’s plans to cut taxes and boost infrastructure spending would boost demand while his proposals to deport illegal immigrants and impose tariffs on cheap imports, if implemented, are seen likely to drive inflation higher.

That prospect has given rise to expectations that U.S. interest rates will rise faster than earlier anticipated, making the dollar stronger, but investors are still trying to assess what opportunities a Trump presidency will bring.

“The markets are having a bit of a pause at the moment. But people still want to do more of this trade,” said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management in Tokyo.

“If you look at the U.S. markets, investors are looking at coming infrastructure spending and so on and they are rotating to stocks from bonds.”

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.6 percent on Wednesday, bouncing back from a four-month low touched earlier this week.

The dollar’s strength has fanned fears investors could shift funds to the United States from emerging markets. Emerging market stocks managed to rise 0.3 percent on Tuesday after having fallen 7 percent over the previous four sessions.

Japan’s Nikkei rose 1.1 percent to nine-month high on Wednesday, thanks to the dollar’s retreat from a 5 1/2-month high against the yen.

The dollar was trading at 109.03 yen in late morning trade in Asia, having slipped slightly off high of 109.34 yen struck on Tuesday.

On Wall Street, the Dow Jones industrial average rose 0.29 percent to a record high while the S&P 500 gained 0.75 percent.

Since Trump’s unexpected victory last week, U.S. shares have rallied while U.S. bond prices tumbled, pushing up their yields sharply.

The yield on 10-year U.S. Treasuries slipped to 2.207 percent from Monday’s 11-month high of 2.302 percent, although that is sharply above its levels around 1.86 percent before the election.

U.S. retail sales rose more than expected in October, pointing to sustained economic strength that could allow the Federal Reserve to raise interest rates next month.

U.S. interest rate futures are pricing in an 85 percent chance of a rate hike, compared to 75 percent before the election.

The two-year U.S. notes yield fell to 0.989 percent on Wednesday, having hit a 10-month high of 1.029 percent on Tuesday.

Nikko SMBC Securities estimates U.S. two-year notes are currently pricing in five Fed rate hikes in the next two years, said senior strategist Makoto Noji.

“If we base our assumption on (Fed Chair Janet) Yellen’s gradualist approach, which can be roughly translated as two rate hikes per year, we could say that the market has already priced in tightening they could reasonably imagine at this point,” Noji said.

“But of course if Trump’s policies stoke inflation that cannot be contained by two rate hikes per year, the U.S. bond market could see big moves again,” he added.

Sharp gains in U.S. bond yields have drawn investors to the dollar, and its index against a basket of six major currencies hit its highest level in almost a year on Tuesday.

It slipped slightly in Asia on Wednesday to 99.982, but was still just 0.5 percent away from reaching its highest level in more than 13-1/2 years.

The euro traded at $1.0724, just above Monday’s $1.0709, its lowest level in almost a year.

The Chinese yuan also weakened to 6.8703 to the yuan, its weakest level since December 2008.

Gold traded at $1,232.3 per ounce, not far from a 5 1/2-month low of $1,211.8 seen on Monday.

In contrast, oil prices hovered near their highest levels in about two weeks after having jumped nearly 6 percent on Tuesday on bets OPEC members will agree to cut output when they meet later this month.

U.S. crude futures stood at $45.67 per barrel, after having risen to $46.09 late on Tuesday, their highest since Nov 2.

(Reporting by Hideyuki Sano; Editing by Simon Cameron-Moore)