TOKYO Asian shares were on the defensive on Monday, undermined by fears that the strength in the U.S. dollar and rising U.S. bond yields since Donald Trump’s election to president could accelerate fund outflows from emerging markets.
MSCI’s broadest dollar-based index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dipped 0.1 percent, staying near four-month lows. In local currency terms, many markets are up slightly.
Japan’s Nikkei .N225 rose 0.5 percent to hit a 10-1/2-month high thanks to a weaker yen.
Trump’s unexpected election victory has led to a major repricing of assets, with investors rushing to buy U.S. stocks and the dollar, while dumping bonds and emerging market assets.
Carrying out even some of Trump’s plans for deregulation and tax cuts would undermine assumptions investors had long held – that the U.S. economy would grow modestly and inflation would remain tame in the foreseeable future.
As expectations grow that the Federal Reserve might have to raise interest rates faster than expected under Trump’s reflationary policies, markets have moved towards U.S.-dollar based assets at the expense of emerging nations.
Heightened uncertainty prompted investors to demand a larger premium for holding long-term U.S. debt, with the 10-year U.S. Treasuries yield US10YT=RR soaring to 2.364 percent by last week from around 1.86 percent before the elections.
It last stood at 2.340 percent, with a rise above its 2015 peak of 2.5 percent seen as having potential to spark a further sell-off as bond prices fall.
To be sure, investors have little idea to what extent Trump can implement his proposals, including slapping tariffs on major trading partners such as China and Mexico and going ahead with heavy tax cuts that would widen the U.S. fiscal deficit.
Some investors think the market will have a reality check as soon as differences start to emerge between the new administration and Congress over some of Trump’s policies.
“Next week, we have events that would make investors more sober, such as OPEC meeting and Italian referendum. By then this Trump-inspired market may come to an end for now,” said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
Higher U.S. yields are helping the dollar continue its bull run. The U.S. unit rose to as high as 111.125 JPY=, its highest level since early June. It last stood at 110.865.
It has risen almost 10 percent from its low of 101.19 hit on Nov 9, when Trump’s victory was initially seen as stoking uncertainty and triggering a rush to safer assets such as the yen.
The euro EUR= traded $1.0589, having hit a near one-year low of $1.0569 on Friday.
The Australian dollar hit a 4-1/2-month low of $0.7315 while the Chinese yuan CNY=CFXS fell to an eight-year low of 6.8975 to the dollar.
The data from the U.S. financial watchdog showed on Friday that in the first week after the U.S. elections speculators hardly increased their net long positions in the dollar.
“This suggests the leveraged fund community largely missed out on the dollar rally,” analysts at ANZ Research wrote.
Many emerging market currencies remained under pressure on fears investors could bring their money back to the United States. The Malaysia ringgit hit 14-month low MYR= while the Philippine peso PHP= edged near its 2008 low.
Oil prices rose in early Monday trade after five-percent gains last week, their first weekly gains in about a month, on growing expectations that OPEC will find a way to cap production.
The Organization of the Petroleum Exporting Countries is moving closer to finalizing its first deal since 2008 to limit output, with most members prepared to offer Iran flexibility on production volumes, ministers and sources said.
Brent crude futures LCOc1 rose 1.2 percent to $47.41 per barrel.
(Reporting by Hideyuki Sano; Editing by Eric Meijer & Shri Navaratnam)