Asian shares skid as COVID surge in China unsettles investors

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By Ankur Banerjee

SINGAPORE (Reuters) - Asian share markets fell along with oil prices on Thursday as soaring COVID cases in China unsettled investors who have been expecting the world's second biggest economy to regather momentum after the relaxation of stringent COVID curbs.

MSCI's broadest index of Asia-Pacific shares outside Japan was down 1.06%, and was set for a third straight week of losses.

China shares opened 0.4% lower, while Hong Kong's stock market fell 1%. Japan's Nikkei fell more than 1% to a nearly three month low, while Australia's resource heavy S&P/ASX 200 index lost 1.18%.

China's health system has come under heavy stress since Beijing started dismantling its zero-COVID regime at the start of the month.

On Monday, China announced it would end quarantine requirements for inbound travellers on Jan. 8, and several countries, including the United States and Japan, have made COVID tests mandatory for travellers from China.

Nomura analysts said in a note that there could be significant waves of infection across China, spreading from urban to rural areas, during the nationwide travel rush for the Lunar New Year which falls on Jan. 22.

"China may find itself in a difficult situation due to its procrastination on embracing a 'living with COVID' approach," Nomura analysts said, noting that the previous zero-COVID policy could have overprotected people, raising the risk of a surge in infections once the controls were removed.

Concerns that central banks efforts to tame inflation could lead to an economic slowdown and the uncertainty over how China's economy will fare following the removal of COVID controls have kept markets subdued.

Markets are now pricing in 69% chance of a 25-basis point rate hike when the U.S. Federal Reserve holds a policy review in February, and they are now looking at U.S. rates peaking at 4.94% in the first half of next year.

The Fed raised interest rates by 50 bps earlier in December after delivering four consecutive 75 bps hikes but has said it may need to keep higher interest rates for longer.

U.S. treasury yields have risen as traders attempt to assess the impact of China reopening its economy on the Fed's rate hike policy.

The yield on 10-year Treasury notes was down 2.2 basis points to 3.864%, not far off six-week high of 3.89% it hit in the previous session.

The yield on the 30-year Treasury bond was down 2.1 basis points to 3.956%. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1 basis point at 4.349%.

In the commodities market, U.S. crude fell 0.52% to $78.55 per barrel and Brent was at $82.84, down 0.5% on the day. Surging COVID cases in China has raised doubts over a fast recovery in fuel demand in the world's second-biggest oil consumer. [O/R]

Spot gold added 0.2% to $1,807.98 an ounce. U.S. gold futures fell 0.17% to $1,805.80 an ounce.

In the currency market, the Japanese yen strengthened 0.56% versus the greenback at 133.70 per dollar, while sterling was last trading at $1.2044, up 0.26% on the day.

The dollar index, which measures the dollar against six major currencies, fell 0.057%, with the euro up 0.19% to $1.0628.