Asia stocks scale 4-month high on reopening of Chinese economy

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By Tom Westbrook

SINGAPORE (Reuters) - Asian shares rose on Thursday on hopes for China's emergence from the pandemic, while the dollar found support after analysts spotted a warning against betting too heavily on rate cuts this year in minutes from the last Federal Reserve policy meeting.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1% to touch a four-month high at one stage, before paring gains. Japan's Nikkei bounced off a three-month low. U.S. and European futures were flat.

China has abruptly dropped ultra-strict curbs on travel and activity, unleashing the virus on the nation's 1.4 billion people. Many funeral homes and hospitals say they are overwhelmed, but investors hope that once the infection waves pass, life and spending can return to normal and are looking beyond the most immediate difficulties.

"China reopening has a big impact...worldwide," said Joanne Goh, an investment strategist at DBS Bank in Singapore, since it not only spurs tourism and consumption but can ease some of the supply-chain crunches seen during 2022.

"There will be hiccups on the way," Goh said, during an outlook presentation to reporters. "We give it six months adjusting to the process. But we don't think it's reversible."

China's central bank also said overnight it will step up financing support to spur domestic consumption and key investment projects and support a stable real estate market.

E-commerce and consumer stocks were among the biggest gainers in Hong Kong, which touched a six-month high and was last up 1%. Reopening hopes have driven China's yuan to four-month highs and supported regional stocks and currencies.

The yuan rose about 0.2% to 6.8750 on Thursday.

China has partially eased an unofficial ban on Australian coal imports and the Australian dollar made a three-week high overnight just below $0.69. It last bought $0.6818.

Shares fell for Indonesian coal exporters, which had filled some of the gap left by blocked Australian supply. (SO)

Oil sounded the loudest note of caution, falling sharply overnight on worries that the near-term outlook is precarious in China and that a global slowdown will hurt demand. [O/R]

Brent crude futures steadied at $78.79 a barrel on Thursday after dropping 1.5% on Wednesday.

RATES WARNING

Asia's optimism comes while minutes from the Federal Reserve's December meeting, published on Wednesday, contained a caution against late-year rate cuts traders have priced in.

Fed committee members noted that "unwarranted easing in financial conditions" would complicate efforts to restore price stability, the minutes showed.

"Translating Fed speak, this is a warning to markets, that being too optimistic may ironically backfire," said Vishnu Varathan, Mizuho Bank's head of economics in Singapore.

"That is, insofar that premature rate cut bets drive looser financial conditions, the Fed may have to tighten even more to compensate."

Fed funds futures pricing shows traders think the benchmark U.S. interest rate will peak just below 5% in May or June, before being cut back a little bit in the second half of 2023.

Treasuries hung on to recent gains, with 10-year yields down 11 basis points this week to 3.72%. Yields fall when prices rise.

In currency markets, the dollar has been wobbly as investors navigate between the Fed's hawkish tone and the support for riskier currencies driven by China's reopening.

The yen was steady at 132.56 per dollar, supported by wagers that Japan's ultra-easy monetary policy will be finally tightened this year.

In Europe, unseasonally warm weather has disappointed skiers but been a boon for a euro basking in falling gas prices. Benchmark Dutch gas prices fell to 14-month lows overnight and the euro held at $1.0605. [FRX/]