Update: Asia stocks take heart from Wall Street rally, China gains

[TOKYO] Asian stocks extended gains on Thursday as a sharp rebound on Wall Street and gains in battered Chinese shares eased fears of a deep and protracted global market rout, while the dollar rallied as risk aversion eased.

Sentiment was also supported by comments from New York Fed President William Dudley on Wednesday who said the prospect of a September rate hike "seems less compelling" than it was only weeks ago given the threat posed to the US economy by recent market turmoil.

Still, some investors remained on edge, after European shares slid nearly 2 per cent overnight and ahead of more readings on China's factory and services sector activity early next week.

Markets around the world plunged earlier in the week as a slump in Shanghai shares fuelled worries over China's economic health, but some calm returned after Beijing rolled out strong policy easing steps late on Tuesday.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.8 per cent, pulling away from a three-year low hit earlier in the week.

Chinese shares, the epicentre of recent financial market tremors, rose in early trading, with the CSI300 index adding 2.5 per cent and the Shanghai Composite Index gaining 2.1 per cent. The indexes had plunged more than 20 per cent over the past week.

Tokyo's Nikkei rose 1.8 per cent, adding to the previous day's 3.2 per cent gain, after US stocks racked up their biggest one-day gain in four years.

Ironically, US stocks rallied on Wednesday on expectations that the Fed will hold off from hiking interest rates next month due to mounting global uncertainties, including China - the very factors that prompted heavy selling in the previous sessions. "The market has started to price in this prospect while the current level provides a good short-term rebound opportunity,"said Shigemitsu Tsuruta, senior strategist at SMBC Friend Securities, referring to speculation that the Fed will decide to wait.

Chinese shares ended lower in the previous session as a double-barrelled blast of central bank stimulus failed to convince investors of Beijing's ability to jolt the world's second-biggest economy out of its slowdown.

In currencies, the dollar dipped briefly overnight after Mr Dudley's comments on the chances of a September rate hike.

However, he warned about overreacting to "short-term" market moves, and left the door ajar to raising rates when the US central bank holds a policy meeting on Sept 16-17.

The greenback subsequently rallied as ebbing risk aversion reduced demand for the yen and euro, which had been bought as safe haven plays during the recent equity selling.

The dollar got an additional boost from upbeat US durable orders data, which backed the view that the Fed would remain on track to eventually raise interest rates as the US economy continues to recover.

Against the Japanese currency, the greenback fetched 120.16 yen, up 0.2 per cent from US levels and recovering from a seven-month low of 116.15 plumbed on Monday The euro was up about 0.1 per cent at US$1.1327 after losing 1.7 per cent overnight, knocked further away from a seven-month peak of US$1.1715 scaled on Monday.

The common currency was also hurt by comments from a senior European Central Bank official. Peter Praet said the risk of the ECB missing its inflation target has increased due to commodity price falls and weakness in some overseas economies.

Crude oil rebounded amid a general thaw in global risk aversion. US crude futures bounced 2.3 per cent to US$39.50 a barrel. The contracts had slumped to a 6-1/2-year low on Monday, dogged by supply glut woes and worries of a hard landing by China's economy. Brent added 2.4 per cent to US$44.16.

Gold took back some lost ground after suffering its biggest fall in five weeks overnight as the dollar rebounded and US stocks rallied. Spot gold rose about 0.3 per cent to US$1,127.50 an ounce.

REUTERS