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Asia: Stocks bounce on US cues though US dollar gains may clip wings

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[HONG KONG] Asian stocks edged higher on Monday, helped by a strong Wall Street, and the US dollar stood tall against rivals after the latest US payrolls data indicated strong underlying wage growth, strengthening the case for more rate increases in 2017.

Underlying sentiment was increasingly cautious as investors grew wary of the corrosive effects of a stronger greenback on some Asian markets such as Hong Kong and before a news conference by President-elect Donald Trump on Wednesday where his views on global trade and China will be carefully scrutinised for future policy implications.

MSCI's ex-Japan Asia-Pacific shares index rose 0.3 per cent after posting a rare loss in the previous session. Australia's S&P/ASX200 rose 1 per cent while Hong Kong shares rose 0.4 per cent. Trading was light because Japan is shut for a holiday.

"The US dollar's rising strength will be a growing concern for Asian markets, particularly Hong Kong and investors will be waiting for Trump's comments to get some clues on what areas the new administration will focus on," said Alex Wong, a portfolio manager at Hong Kong-based Ample Capital.

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Foreign investors would be wary of buying local Hong Kong assets due to the Hong Kong dollar's three-decade long peg with the US dollar, while the domestic business environment, particularly for retailers, would suffer more as local residents spend more abroad.

Notwithstanding the growing worries around Mr Trump's stance towards emerging markets on trade, 2017 has begun on a positive note in terms of capital flows for Asian markets, helped by an extended rally in US equities.

Combined investment flows into Asia were positive at nearly US$600 million for the week ending 4th January, reversing outflows posted for the previous week, according to data compiled by Nomura analysts.

US stocks ended at record highs fuelled by optimism over Mr Trump's plans to stimulate the economy with lower taxes and increased infrastructure spending. Both the Nasdaq and the S&P 500 ended at record highs.

But with markets perched at record highs and valuations at the upper end of historical trading ranges, particularly in the US, market analysts are keenly aware that even a small disappointment from Mr Trump's policy proposals could trigger a massive wave of profit-taking.

In currencies, the US dollar started the week on a firm note after Friday's data showed a rebound in US wages pointing to sustained labour market momentum and more rate increases from the US Federal Reserve.

"With expectations of more rate hikes on the horizon, we believe the US dollar will resume its upward trend versus emerging market Asia currencies in the coming weeks," Gao Qi, an FX strategist at ScotiaBank in Singapore wrote in a client note.

The US dollar was trading at 117.21 yen, nearly 2 per cent above Friday's lows of around 115. It was steady at 102.20 against a basket of currencies China's yuan gained on Monday after Beijing fixed the daily official fixing stronger than market expectations and following weekend news showing foreign exchange reserves fell to near six-year lows as authorities stepped up their intervention to protect the currency.

Bonds were stung by the strong US data with both two-year and 10-year US Treasury yields inching higher as market participants pondered the probability of more rate hikes in 2017.

The yield on two-year US Treasury notes was perched at 1.21 per cent versus Thursday's low of 1.17 per cent.

Oil prices edged lower thanks to a stronger US dollar and growing concerns over whether Opec producers would stick to an agreement to cut output. Brent crude futures were down 0.3 per cent in early trade.

REUTERS

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