Asia: Stocks pare weekly gain amid US dollar rebound; bonds advance

[HONG KONG] A rebound in global equities sputtered in Asian trading as the US dollar strengthened and oil retreated from a two-week high. Bonds extended gains, buoyed by central bank commitments to keep monetary policies loose.

The MSCI Asia Pacific Index pared its biggest weekly rally in two months as Japanese shares retreated following a holiday. US equity index futures were steady after the Nasdaq 100 Index closed at an all-time high.

The yen and New Zealand's dollar were the biggest losers among major currencies. Benchmark bonds rallied in Australia, Japan and New Zealand, while gold fell for the first time this week. Crude fell below US$46 a barrel with investors weighing prospects for major producers to agree output constraints at talks next week in Algiers.

Stocks, bonds and commodities climbed this week and the US dollar weakened as the Federal Reserve scaled back its plans for interest-rate increases in 2017 and beyond.

Investor sentiment also got a lift as the Bank of Japan strengthened its commitment to reviving inflation, while Indonesia cut interest rates for the fifth time this year and policy makers in New Zealand signalled further easing.

Janus Capital Group's Bill Gross said a bear market in government debt has been delayed, while former Fed Chairman Alan Greenspan called the rally in US Treasuries unsustainable.

"There's a very bullish case for equities considering that the Fed is now expecting only two rate hikes in 2017," said James Woods, a strategist at Rivkin Securities in Sydney.

"There are uncertainties that could shake up some volatility in the market, including the US elections in November."

Preliminary data pointed to a pickup in Japanese manufacturing this month ahead of the release of gauges tracking factory output and services activity in the France, Germany and the euro area.

Regional Fed chiefs for Atlanta, Cleveland and Philadelphia may comment on US monetary policy when they appear as panelists at a conference on Friday.

Stocks

The MSCI Asia Pacific Index was down 0.3 per cent as of 11am Tokyo time, trimming its weekly gain to 3.5 per cent. Japan's Topix index fell 0.2 per cent, while Australia's S&P/ASX 200 Index added 0.4 per cent.

The Hang Seng China Enterprise Index of mainland companies traded in Hong Kong gained 0.2 per cent. It has rallied 14 per cent this quarter, compared with a 3.9 per cent advance by the Shanghai Composite Index - the biggest outperformance since 2011.

Cheaper valuations, a stable currency, and the imminent start of a second exchange link with China are all lures for mainland investors who've flocked to buy Hong Kong stocks in recent weeks.

Futures on the S&P 500 Index were little changed after the US benchmark rose 0.7 per cent to a two-week high in the last session. The technology-heavy Nasdaq 100 Index advanced 0.8 per cent on Thursday.

Currencies

The Bloomberg Dollar Spot Index gained 0.1 per cent, trimming this week's drop to 0.7 per cent. The yen and the kiwi weakened 0.4 per cent, with the latter sliding amid growing expectations that New Zealand's central bank will cut interest rates at its next policy meeting in November.

Goldman Sachs Group Inc reiterated its long-held view that the yen will weaken, even after a shift in BOJ policy failed to prevent the currency climbing for a third week.

Bonds

Yields on Australian government debt due in a decade fell two basis points to 2.01 per cent, their lowest level in two weeks. Rates on similar-maturity New Zealand bonds slipped four basis points to 2.45 per cent, while Japan's yield declined 1-1/2 basis points to minus 0.05 per cent.

Ten-year Treasuries yielded 1.62 per cent, little changed from Thursday and down seven basis points from a week ago. Treasuries have rallied this year as the Fed delayed tightening policy multiple times after raising its benchmark interest rate from near zero in December.

While signs of US labour market strength have led bond traders to price in the growing likelihood of a rate increase by year-end, other data such as August retail sales and industrial production have shown declines.

Futures prices indicate a 59 per cent chance of a Fed rate increase this year, up from 55 per cent at the end of last week. Still, the tightening cycle is poised to be the slowest and shallowest in recent history, based on the market for overnight index swaps.

Benchmark German 10-year bund yields dropped the most since June 24 on Thursday, while those on Spanish five- and 10-year securities slid to all-time lows.

BLOOMBERG