Asia's Stocks Reached A Four-Month High As The Chinese Economy Reopened

SINGAPORE, (Reuters) - On Thursday, Asian stocks surged on investor optimism about China's recovery from the COVID-19 outbreak, while the dollar remained under pressure despite the Federal Reserve's caution against market expectations on interest rate reduction this year.

MSCI's broadest index of Asia-Pacific equities outside Japan surged 1% in early trading to a four-month high. Japan's Nikkei 225 index recovered from a three-month low.

China immediately lifted ultra-strict travel and activity restrictions, allowing the virus to infect the country's 1.4 billion citizens. Many funeral homes and hospitals report being overburdened, but investors believe that after the virus waves pass, life and expenditure will return to normal, and they are seeing past the most urgent concerns.

“China reopening has a major impact...globally,” said Joanne Goh, an investment strategist at DBS Bank in Singapore, since it not only boosts tourism and spending but also helps to alleviate some of the supply-chain constraints anticipated in 2022.

“There will be hitches along the road,” Goh warned during a press conference. “We give it six months to become used to the procedure. However, we do not believe it is reversible.”

China's central bank also said tonight that it would provide financial assistance to stimulate domestic consumption and critical investment projects, as well as to sustain a stable real estate market.

E-commerce and consumer companies were among the top gainers in Hong Kong, propelling the Hang Seng 2% higher to a six-month high, while reopening prospects pushed China's yuan to four-month highs, supporting regional equities and currencies.

On Thursday, the yuan gained roughly 0.2% to 6.8750.

China has lifted an unofficial restriction on Australian coal imports, and the Australian dollar hit a three-week high overnight, slightly below $0.69. It most recently spent $0.6833.

Oil was the most cautious, plunging dramatically overnight on fears that China's near-term outlook is uncertain and that a global recession could damage demand. [O/R]

Brent oil futures were stable at $78.42 a barrel on Thursday, after falling 1.5% on Wednesday.

Rates alert

Asia's confidence comes as minutes from the Federal Reserve's December meeting were released on Wednesday, with a warning against late-year rate reduction that markets have priced in.

According to the minutes, Fed committee members expressed concern that “unwarranted relaxation in financial conditions” might hinder attempts to restore price stability.

“In Fed language, this is a caution to markets that being too enthusiastic may backfire,” said Vishnu Varathan, head of economics at Mizuho Bank in Singapore.

“That is, if premature rate reduction bets lead to looser financial conditions, the Fed may need to tighten much more to compensate.”

Fed funds futures pricing indicates that traders believe the benchmark US interest rate will peak at just around 5% in May or June, before easing somewhat in the second half of 2023.

Wall Street indexes varied on Wednesday before finishing with slight gains, while futures struggled in Asia trade, with S&P 500 futures down approximately 0.4% at the time of writing.

Treasuries held on to recent gains, with 10-year rates falling a dozen basis points to 3.7070% this week. When prices rise, yields fall.

The dollar has been shaky in currency markets as investors try to navigate between the Fed's hawkish tone and the support for riskier currencies fueled by China's reopening.

The yen was recovering overnight losses and rising 0.5% to 131.87 per dollar, as traders expect Japan to tighten policy this year.

Unseasonably mild weather in Europe has disappointed skiers while benefiting the euro, which has benefited from lowering gas costs. Overnight, benchmark Dutch gas prices plummeted to 14-month lows, as the euro rose to $1.0619. [FRX/]

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