Asian futures tip stock rebound as bonds track Treasury selloff

[NEW YORK] Index futures signaled a rebound in Asian stocks as the dollar held gains, while bonds in the region paced a selloff in Treasuries after US retail sales data bolstered the case for higher interest rates as the Federal Reserve prepares to meet.

Futures on equity gauges from Japan to Australia rallied in recent trading, after a second day of losses in Chinese shares sent the Asian stock benchmark to a one-week low. The greenback halted a seven-day decline versus Australia's currency. Ten-year Australian and New Zealand bonds sank following a 10 basis-point surge in similar maturity Treasury yields, while US oil extended its advance into a second day ahead of American stockpiles data.

"Global markets were in a more buoyant mood with core sovereign bond yields and equity markets rising," Con Williams, an agricultural economist in Wellington at ANZ Bank New Zealand Ltd, said in a note to clients. The US retail sales data Tuesday "suggest the consumer is in fine fettle, and hasn't been unsettled by August's equity volatility or slowdown in China," he wrote.

A second month of gains in US retail sales bolstered optimism over American consumption, even as separate data indicated a pullback in industrial output. The numbers came a day before the Fed meets to decide whether the economy can withstand higher borrowing costs, with odds on a rate hike on Thursday holding at 28 per cent, down from more than 50 percent before China roiled global markets by devaluing the yuan. The largest US exchange-traded fund tracking Chinese shares extended losses Tuesday.

Nikkei 225 Stock Average futures jumped 1.2 per cent in recent Osaka trading, while contracts on the Standard & Poor's 500 Index were little changed by 7:58 a.m. Tokyo time following a 1.3 per cent rebound in the gauge. The dollar rose 0.1 per cent versus the Aussie and was at 120.37 yen after gaining 0.2 per cent last session. Ten-year Australian government bond yields climbed 13 basis points to 2.81 per cent as the S&P/NZX 50 Index rallied 0.4 per cent in Wellington. Oil advanced 1 per cent to US$45.02 a barrel.

The debate over whether the Fed will pull the trigger on the first US rate increase since 2006 is entering its final hours, with economists and the market split on what action policy makers will take in Washington later this week. Some analysts are suggesting the Fed consider a 1/8 percentage point increase in the benchmark rate, as opposed to the more typical quarter-point hike. A smaller move would allow the Fed to respond to improvements in the world's largest economy, while minimizing disruption in markets already jittery from China's currency move and gyrations in local equities.

Futures on Australia's S&P/ASX 200 Index were pointing to a 1.1 per cent rebound Wednesday, after banking stocks and mining companies drove the index down 1.5 per cent last session. Contracts on the Kospi index in Seoul climbed 0.7 per cent in recent trading, while those on Hong Kong's Hang Seng Index advanced 1.1 per cent.

Chinese futures trading was mixed, with contracts on the FTSE China A50 Index and the Hang Seng China Enterprises Index - - a gauge of mainland shares listed in Hong Kong - up at least 1.2 per cent, while futures on the Shanghai Shenzhen CSI 300 Index dropped 0.3 per cent in most recent trading. The Deutsche X-trackers Harvest CSI 300 China A-Shares exchange-traded fund fell a second day in New York, losing 1.4 per cent.

Nikkei 225 futures rose to 18,100 by 3 am in Osaka, while yen-denominated contracts on the index traded in Chicago added 0.1 per cent to 18,150 after climbing 1.5 per cent in the previous session. The MSCI Asia Pacific Index slipped 0.6 percent on Tuesday as a 3.5 per cent drop in the Shanghai Composite Index soured sentiment toward equities in the region.

The Bloomberg Dollar Spot Index was little changed at 1,205.58 after gaining 0.3 per cent on Tuesday to snap a three- day decline.

Yields on 10-year Treasury notes rose to 2.29 per cent on Tuesday, the highest closing level since July 22. Rates on two- year notes, regarded as being more policy sensitive, climbed by eight basis points to 0.81 per cent, the highest since April 2011.

"Retail sales is positive - everyone looks at the consumer for guidance in the direction and strength of the economy," said Sean Simko, who manages US$8 billion at SEI Investments Co. in Oaks, Pennsylvania.

Yields on 10-year German bunds jumped nine basis points to 0.74 per cent, while similar-maturity Spanish bond rates were little changed after rising for four days.

West Texas Intermediate crude rose a second day, adding to Tuesday's 1.3 per cent climb with an industry group said to have reported a 3.13 million-barrel drop in US oil inventories for last week. The US Energy Information Administration issues government supplies data Wednesday, with analysts predicting a 1 million-barrel decline in stockpiles at the Cushing, Oklahoma delivery point for WTI.

The spread between WTI and Brent narrowed to the smallest in eight months Tuesday amid rising North Sea deliveries and falling stockpiles at the largest US storage hub. A narrowing spread signals that the global supply glut is growing while there may be relative tightening in parts of the US.

The Bank of Japan publishes its September economic report on Wednesday, while Thailand is projected to keep interest rates on hold in a policy review. Sri Lanka updates on gross domestic product and Malaysian markets are closed for a holiday.

BLOOMBERG