Yields in focus as Asia stocks mixed; US dollar down

[SYDNEY] Asian stocks were mixed, after seven days of gains that pushed regional equities to the highest since the financial crisis and following a surge in global bonds as investors weigh the potential for tepid economic growth.

Australian bonds tracked gains in Treasuries, bunds and gilts as weak inflation data combined with concern around the US administration's ability to enact reforms, leaving investors questioning the strength of the global economy.

The US dollar held at the lowest level in almost a year, while an uninspiring session for US equities left futures signaling a muted start for Asian stocks. The euro held its advance ahead of Thursday's European Central Bank meeting.

With global equities at record highs, investors are assessing whether earnings results will be strong enough to warrant lofty prices and if economies are in a position to handle higher interest rates.

The next clues come from meetings of central banks in Japan and Europe this week and profits due Wednesday at companies including Morgan Stanley and Qualcomm Inc.

The market-implied probability of a hike from the Federal Reserve by year-end has declined in the past two weeks with Treasury yields. The odds are now about 40 per cent, down from 60 per cent on July 7, based on the current effective fed funds rate and the forward overnight index swap rate. Part of that is due to signs that Mr Trump's health-care reform bill is effectively dead in its current form, after two more Republican senators announced their opposition to the plan.

The ECB meets Thursday. Bloomberg Intelligence expects no change then, and no rate increase before 2019. Reuters cited unidentified officials as saying the bank is keen to keep asset purchases open-ended.

The Bank of Japan is forecast to stand pat at its meeting Thursday.

Bonds and currencies

The yield on 10-year Australian government bonds slid three basis points to 2.72 per cent.

The yield on 10-year US Treasuries is down seven basis points this week to 2.26 per cent after dropping five basis points last week. The Bloomberg Dollar Spot Index sank 0.5 per cent on Tuesday to its weakest level since August.

Gilts with a similar maturity saw yields fall six basis points to 1.21 per cent on Tuesday as traders reduced bets on a UK rate increase this year following weak inflation data. The pound traded at US$1.3043.

The euro was at US$1.1543 after rising 0.7 per cent amid speculation the ECB could signal its intent to scale back monetary stimulus at its meeting on Thursday.

The Australian dollar traded at 79.25 US cents after surging 1.5 per cent.

The Mexican peso erased earlier losses after S&P Global Ratings revised the Latin American nation's outlook to stable from negative. The currency was up 0.1 per cent at 17.4530 to the US dollar.

Stocks

Japan's Topix index was 0.1 per cent higher, while South Korea's Kospi index was little changed. Hong Kong's Hang Seng Index gained 0.2 per cent, while the Shanghai Composite Index was up 0.3 per cent.

Australia's S&P/ASX 200 Index rose 0.7 per cent as bank shares climbed. Analysts said new capital requirements looked fairly benign.

Futures on the S&P 500 Index were higher after the underlying gauge rose 0.1 per cent to a record 2,460.61 on Tuesday, reversing a loss of 0.4 per cent earlier in the session. The Dow Jones Industrial Average declined 0.3 per cent. The Nasdaq Composite Index gained for a eighth day to reach an all-time high.

Commodities WTI crude slipped 0.3 per cent to US$46.27 a barrel.

Gold was down 0.2 per cent to US$1,241.81 an ounce.

BLOOMBERG