Stocks in Asia gain, dollar sways as Fed minutes take centre stage

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By Ankur Banerjee

SINGAPORE (Reuters) - Asian equities rose sharply on Wednesday, boosted by Hong Kong shares, while the dollar was on the back foot, with investors keenly awaiting minutes from the Federal Reserve's most recent meeting to gauge the path forward for interest rates.

MSCI's broadest index of Asia-Pacific shares outside Japan was 1.3% higher and set for a third straight day of gains for the year. The index fell 20% in 2022, its worst performance since 2008.

Futures indicated the buoyant mood was likely to continue in Europe, with Eurostoxx 50 futures up 0.36%, German DAX futures 0.36% advanced and FTSE futures 0.27% higher. E-mini futures for the S&P 500 rose 0.16%.

Minutes from the Fed's December meeting, when it cautioned rates may need to remain higher for longer, are due to be released later on Wednesday. Investors will parse the minutes to figure out whether more policy tightening is likely.

"The market has made a pretty tentative start to the year ... (and) is still grappling with the notion of what we are going to see from the Fed this year," said Rob Carnell, head of ING's Asia-Pacific research.

"There are two camps out there and they are wrestling for dominance in terms of the view. Some days higher-for-longer wins some days higher-then-lower camp wins," Carnell said.

The U.S. central bank said last month when it raised interest rates by 50 basis points that the terminal rates may need to remain higher for longer to fight inflation.

Markets, however, are pricing in rate cuts for late 2023, with fed fund futures implying a range of 4.25% to 4.5% by December.

Investors will get a better picture of the U.S. labour market this week, with several pieces of data scheduled in the week, culminating in the employment report on Friday. A weakening jobs market is seen as one of the key pieces needed to convince the Fed to begin slowing its monetary tightening path.

"It is too early to start betting on a Fed pivot this year and that should make this difficult environment for stocks," said Edward Moya, senior market analyst at Oanda in New York.

In Asia, Japan's Nikkei lost 1.12%, while Australia's resource heavy S&P/ASX 200 index rose 1.63%.

Chinese stocks climbed while Hong Kong's Hang Seng Index jumped to highest since July as investors remained optimistic about a post-COVID recovery in the wake of China dismantling its stringent "zero-COVID" policy.

In the currency market, the euro rose 0.18% to $1.0565, coming off a three-week low of $1.0519 it touched overnight. A surprise slowdown in German inflation rallied bunds and sent the common currency sliding on Tuesday.

The dollar index, which measures the greenback against six other currencies fell 0.21%, after rising 1% overnight. Sterling was last trading at $1.1981, up 0.13% on the day, having skidded 0.7% lower overnight.

The Japanese yen strengthened 0.12% versus the greenback to 130.85 per dollar.

The yield on 10-year Treasury notes was down 6.4 basis points to 3.728%, while the yield on the 30-year Treasury bond was off 5.6 basis points at 3.835%.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 4.1 basis points at 4.364%.

Oil prices steadied after diving 4.1% on Tuesday, the largest daily decline in more than three months, weighed by weak demand data from China, a gloomy economic outlook and a stronger U.S. dollar.

U.S. crude fell 0.3% to $76.70 per barrel and Brent was at $81.95, down 0.18% on the day.

Spot gold added 0.3% to $1,844.84 an ounce. U.S. gold futures gained 0.32% to $1,845.60 an ounce.